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An essay of fiscal federalism - Coggle Diagram
An essay of fiscal federalism
Fiscal Federalism
Central govt:
Macroeconomic stabilization function
Local governments simply have very limited means for traditional macroeconomic control of their economies
Income redistribution in the form of assistance to the poor
Why? Because the mobility of economic units can seriously constrain attempts to redistribute income
An aggressive local program for the support of low-income households, for example, is likely to induce an influx of the poor and encourage an exodus of those with higher income who must bear the tax burde
Central government must provide certain "national" public goods (like national defense) that pro- vide services to the entire population of the country
Definition: a general normative framework for the assignment of func- tions to different levels of government and the appropriate fiscal instruments for carrying out these functions (e.g., Richard Musgrave 1959; Oates 1972)
Reason:
Decentralized provision increases economic welfare above that which results from the more uniform levels of such services that are likely under national provision
the provision of goods and services whose consumption is limited to their own jurisdictions
Basic idea
The efficient level of output of a "local" public good (i.e., that for which the sum of residents' marginal benefits equals marginal cost) is likely to vary across jurisdictions as a result of both differences in preferences and cost differentials
To maximize overall social welfare thus requires that local outputs vary accordingly
This is only a general guidelines than firm principles. The spe- cific pattern of goods and services pro- vided by different levels of government will thus differ to some extent in time and plac
The basic principle of fiscal decentralization: the presumption that the provision of public services should be located at the lowest level of government encompassing, in a spatial sense, the relevant benefits and costs.
3 general theory
the magnitude of the welfare gains from fiscal decentralization
There exist the gains from the decentralized provision of public goods relative to a more uniform, centrally determined level of output
the potential gains from decentrali- zation stemming from interjurisdic- tional differences in demand vary in- versely with the price elasticity of demand
the magnitude of these gains depends both on the extent of the heterogeneity in demands across juris- dictions and any interjurisdictional dif- ferences in costs
the gains from decentraliza- tion have their source in the famous Tiebout mode
even in the absence of mobility, the efficient level of output of a "local" public good, as determined by the Sam- uelson condition that the sum of the marginal rates of substitution equals marginal cost, will typically vary from one jurisdiction to another.
the foundations of the Decentralization Theorem
... in the absence of cost-savings from the centralized provision of a [local public] good and of interjurisdictional exter- nalities, the level of welfare will always be at least as high (and typically higher) if Pareto-efficient levels of consumption are provided in each jurisdiction than if any single, uniform level of consump- tion is maintained across all jurisdic- tions" (Oates 1972, p. 54)
assuming that centralized provision will entail a uniform level of output across all jurisdictions
Is it possible to prescribe the set of differentiated local outputs? Then no need for fiscal decentralization
one can realistically intro- duce some basic imperfections (or asymmetries) in information
there are typically political pressures (or perhaps even constitutional constraints) that limit the capacity of central governments to pro- vide higher levels of public services in some jurisdictions than others