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Overview and details of the sessions of this online conference.

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Session Overview
F03: Fiscal Federalism and Open Economy Public Finance
Thursday, 19/Aug/2021:
2:15pm - 3:45pm

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2:15pm - 2:37pm

Fiscal equalization and tax-hikes: Evidence from a Swiss reform

Nicola Mauri

University of Lausanne, Switzerland

This paper investigates the magnitude of incentive of fiscal equalization on local tax rates. Using quasi-experimental evidence from a reform in a municipal equalization scheme, I propose three refinements to current empirical estimations of incentive effects of fiscal equalization. I firstly show that local policy-makers may conceive changes in equalization transfers as stemming from discrete rather than marginal changes in the tax base. Second, a measure of “effective" equalization rate which conditions on the current tax rate is introduced. Third, I test the existence of redistribution effects on tax rates and thereby challenge the benevolence assumption of local governments. My results show that past literature using marginal equalization rates may have underestimated incentive effects from fiscal equalization. Effective equalization rates are shown to have a small or negative impact on tax rates. No evidence of redistribution effects is found which suggests that jurisdictions are revenue maximizers rather than utility maximizers.

Mauri-Fiscal equalization and tax-hikes-194.pdf

2:37pm - 3:00pm

The Valuation of Local Government Spending: Gravity Approach and Aggregate Implications

Wookun Kim

Southern Methodist University, United States of America

How much do people value local government spending? What are the effects of fiscal transfers that finance this spending? I develop a spatial equilibrium framework where people’s simultaneous (internal) migration and commuting choices reveal preferences. I combine this framework with administrative data from South Korea and leverage the plausibly exogenous variation in local government spending across districts induced by national tax reforms in 2008 and 2012. The estimated mobility responses imply that workers value each additional dollar of per-capita local government spending by 75 cents of their after-tax income. The general-equilibrium counterfactuals imply that a fiscal arrangement with lower redistribution would result in aggregate gains. A key aspect of my analysis is that bilateral migration and commuting decisions are made jointly. Ignoring any one of these margins biases the estimates of preferences for public goods, distance elasticities of migration or commuting, and the aggregate effects of alternative fiscal arrangements.

Kim-The Valuation of Local Government Spending-108.pdf

3:00pm - 3:22pm

The Marginal Value of Public Funds as a Measure of Welfare in an Open Economy

David R Agrawal1, William H Hoyt1, Tidiane Ly2

1University of Kentucky Martin School, United States of America; 2Università della Svizzera italiana, Switzerland

Our objective is to establish and provide a framework for quantifying and calculating the welfare effects of taxation in an open economy, with an emphasis on state and local governments in a federalist system. We do so by developing a model of fiscal policy when there are spillovers in tax bases and expenditures among competing local jurisdictions. We then derive how open economy considerations influence the marginal value of public funds (Hendren 2016). We provide guidance on the additional components of the marginal value of public funds necessary to better understand the welfare effects of spending and taxes in federalist system.

Agrawal-The Marginal Value of Public Funds as a Measure of Welfare-521.pdf

3:22pm - 3:45pm

Random Policies in Federations

James R. Hines Jr.

University of Michigan

This paper compares outcomes in which centralized and decentralized governments adopt policies of random quality. With freely mobile populations, jurisdictions adopting superior policies experience population inflows. If uncorrected congestion costs are small, then policy diversity promotes higher welfare levels. With significant unpriced convex congestion costs, however, this welfare ordering is reversed: competition induces so great a concentration of population in jurisdictions adopting superior policies that consumer welfare is lower than with centralized (and harmonized) policies. If interjurisdictional mobility is sufficiently limited by rising costs of local fixed factors, diversity among decentralized governments again produces higher welfare than harmonization. Hence the welfare impact of centralization and accompanying policy harmonization depends critically on the nature of crowding costs.

Hines Jr.-Random Policies in Federations-359.pdf

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