“Dynamic Tax Externalities and the U.S. Fiscal Transformation,” JME

Summary:
Accepted for publication in the Journal of Monetary Economics, with Martin Gonzalez-Eiras. PDF. (Appendix: PDF.) We propose a theory of tax centralization in politico-economic equilibrium. Taxation has dynamic general equilibrium implications which are internalized at the federal, but not at the regional level. The political support for taxation therefore differs across levels of government. Complementarities on the spending side decouple the equilibrium composition of spending and taxation and create a role for inter governmental grants. The model provides an explanation for the centralization of revenue, introduction of grants, and expansion of federal income taxation in the U.S. around the time of the New Deal. Quantitatively, it accounts for approximately 30% of the federal revenue

Topics:
Dirk Niepelt considers the following as important: Centralization, Decentralization, Fiscal federalism, General equilibrium, Grant, Income tax, Politico-economic equilibrium, Research, Tax, United States

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