Fiscal Reconstruction and Local Government Financing

This paper investigates the dynamic properties of intergovernmental financing during a fiscal reconstruction process by analyzing the dynamic game among local governments, which operates with soft budget constraints because of concessionary region-specific transfers from a central government. The existence of intergovernmental transfers induces the free-riding behavior of local governments, thereby bringing considerable deficits to the central government. Raising local and/or national taxes is desirable for fiscal reconstruction, but is unable to attain the Pareto-efficient fiscal reconstruction. Taxes on lobbying activities, combined with uniform transfers, induce earlier concession and can attain the Pareto-efficient outcome in the long run.     

Taxation without representation: local fiscal response to intergovernmental transfers in China

This paper studies the effects of intergovernmental transfers on local public spending in China, an authoritarian country where local politicians are not largely accountable to residents. The identification exploits a discontinuity from the central government’s designation of National Poor Counties. We find that additional transfers to county governments increase local public spending one-for-one. We further confirm that counties receiving additional transfers do not reduce the effective tax burden borne by firms. The results echo the empirical anomaly of the flypaper effect found in developed economies under democratic governments.     

Local fiscal equalisation based on fiscal capacity: the case of Austria

This paper deals with local fiscal equalisation in Austria. The system of intergovernmental relations in Austria includes different regulations in order to equalise differences in the fiscal capacity of the municipalities. This leads to so‐called ‘compensation effects’, because additional revenues from a local government's own tax are (at least partly) compensated by losses from equalisation grants. This paper carries out a detailed analysis of these compensation effects. It is shown that they create strong fiscal disincentives for the local governments: on average, 55 per cent of additional revenues from the communal tax (which is the most important of a local government's own taxes) are compensated by losses of equalisation grants. In extreme cases, local governments can lose up to 144 per cent of the additional tax yields collected. These local governments would be better off if they made no effort to increase their tax base.     

Fiscal Transfers and Fiscal Sustainability

We examine whether the U.S. and German state governments pursue sustainable fiscal policies taking into account fiscal transfers. Using panel data techniques we investigate whether the debt‐to‐GDP ratio had a positive influence on the primary surplus (Bohn model). We show that including/excluding fiscal transfers changes the results. If fiscal transfers are not included in the primary surplus, the test results do not indicate that the U.S. and German state governments pursued sustainable fiscal policies. Our results also suggest that fiscal transfers were positively related to debt. These findings indicate that intergovernmental transfers have implicitly subsidized debts.     

Local tax rebates,corporate tax burdens,and firm migration: Evidence from China

Conflicts of interest between local governments and the central administration in China have yielded many local policies that only serve the interests of local governments. The policy of first levying and then rebating taxes is an example of how local governments eschew the national tax regulations to boost local economies rather than national interests. In 2001, the Chinese government announced the termination of local tax rebates, which had some expected outcomes. We find that local governments complied with the new tax policy even though it no longer allowed local governments to grant tax incentives. However, some companies found ways to avoid the greater tax burdens by moving their business registration locations to tax havens. We also find that firms controlled by local governments were less likely to change registration locations. Our study examines the national tax regulation in China and explores how tax rules influence company decisions. In addition, we show that non-tax incentives, such as local economic development, may also influence company decisions.     

The stimulative effects of intergovernmental grants and the marginal cost of public funds

This paper tests the hypothesis that the stimulative effects of intergovernmental grants increase with the marginal cost of public funds of the recipient government. We present a simple theoretical framework that shows how a lump-sum transfer stimulates the marginal expenditures of a recipient government through an income effect and a price effect. We then test the prediction of this model using Canadian provincial data and exploit the discontinuity in the equalization grants allocation formula to identify the effects of grants. Our results indicate that the stimulative effects of lump-sum grants on spending increase with the provincial government’s marginal cost of public funds (MCF). One policy implication of our results is that higher intergovernmental transfers may be welfare improving if the federal government has a lower MCF than the provinces.     

Improving corporate governance where the State is the controlling block holder: evidence from China

This paper examines changes in values and returns for Chinese firms around announcements of block-share transfers among government agencies, State-owned enterprises and private investors. We find that transfers to all three types of investors result in positive abnormal returns around transfer announcements, even when the transfers do not create a new controlling block holder and when transfers are between State entities. We also find that transfers from State entities to private entities result in larger increases in value and returns than transfers between State-controlled entities – consistent with the superior incentives and expertise of private investors. We conclude that corporate governance can be improved at State-controlled firms by improving incentives and expertise of controlling block holders.     

转移支付与地方政府支出规模膨胀——基于中国预算制度的一个实证解释

自2000年以来,为了缩小地区间差距和促进基本公共服务均等化,我国的财政转移支付规模迅速扩大。本文利用1994-2015年省级年度数据发现,地方政府获得的一般性转移支付和专项转移支付每增加1元,年度一般预算财政支出将分别增加1.61元和2.12元,远远超过本地财政收入增加所产生的影响。这也意味着财政转移支付在我国产生了较大的“粘蝇纸效应”。在2010年提前下达固定数额转移支付指标改革后,一般性转移支付的“粘蝇纸效应”有所下降。使用分月数据的回归结果显示,“年底突击花钱”对专项转移支付“粘蝇纸效应”的贡献最大。本文的研究表明,转移支付引发的地方财政收入的不确定性、转移支付下拨时滞以及刚性的年度预算平衡制度是导致我国地方政府支出规模膨胀的重要原因。本文的研究结论意味着,中央应进一步规范转移支付制度、扩大提前下达转移支付指标的范围、加快转移支付的拨付进度、建立和完善跨年度预算平衡机制、积极防范转移支付的道德风险问题。地方各级政府应该加强预算执行管理,强化预算约束力。     

地区竞争、支出责任下移与地方政府债务扩张

地方政府债务过度扩张容易引发系统性经济风险。本文通过一个地方政府举债行为理论模型,分析了政府间共同事权的支出责任下移、竞争性地区的举债行为对地方政府债务规模的影响。在此基础上构建空间面板计量模型,利用279个地级市数据进行回归分析,结果表明:地方政府债务扩张是支出责任下移与标尺竞争机制共同驱动的结果;政府间支出责任下移造成的财政压力是地方政府被动负债的重要原因;地方政府间的标尺竞争使其在举债融资行为上表现为明显的策略模仿;各地区在债务扩张的主因上存在异质性,东部地区政府债务的增加主要是地区间竞争的结果。这意味着化解地方政府债务风险不仅应规范政府间财政支出责任划分,更重要的是完善地方政府的政绩考核体系和违规举债的问责机制。     

Flypaper Effect and Sluggishness: Evidence from Regional Health Expenditure in Italy

In Italy, public expenditure reduction is achieved through a revision of social security and health care programs. In particular, public health expenditure control has been implemented through a reform that imposes more stringent budget rules to local governments and a considerable reduction in grants-in-aid from the central government. This paper investigates empirically whether the response to this decrease in categorical lump-sum grants from the central to local governments results in an asymmetric response to intergovernmental grants. Hard budget and soft budget constraint hypotheses are estimated by using a sample of cross-sectional and time observations covering the 20 Italian regions over the period 1989–1993. The main finding is the existence of a standard and a super flypaper effect in both models. The introduction of the soft-budget constraint hypothesis results in a stronger effect of grants and a lower response of own resources which shows that local governments prefer to incur some deficit instead of reducing health care expenditure.     

Obstacles to Financial Development in Transition Economies: A Literature Survey

This survey of approximately 70 studies considers five causes of weak financial system development in transition economies. These are: problem loans and inadequate capital; the absence of a credit culture, giving rise to perverse incentives to continue to make bad loans; inadequate regulatory systems; deposit insurance; and weak legal systems. There results a perverse feedback loop across the various problem areas that constrains the development of solutions. Policy recommendations include a focus on basic contract law as a way to break the perverse feedback loop.     

Wagner’s law,fiscal discipline,and intergovernmental transfer: empirical evidence at the US and German state levels

Does fiscal discipline restrain the government from increasing its budget size? To answer this question, this paper investigates whether Wagner’s law is satisfied for two types of states: US states, in which fiscal sovereignty is established, and German states, in which fiscal transfer dependence is high and budget constraints are softened. In US states, we demonstrate that Wagner’s law is validated, while some of the balanced budget requirements weaken the validity of the law. In German states, we find an “inverse” law, especially after the bailouts of Bremen and Saarland. The “inverse” law is a new channel of growth in government size and means that soft budget constraints cause significant negative correlation between government size and output. These results are robust regardless of whether intergovernmental fiscal transfers are taken into account, while they quantitatively change the validity of the law. Our findings imply that the characteristics of fiscal discipline are the prime determinants of the channel and degree of growth in government size.     

Tax Setting in a Federal System: The Case of Personal Income Taxation in Canada

In a decentralised tax system, the effects of tax policies enacted by one government are not confined to its own jurisdiction. First, if both the regional and the federal levels of government co-occupy the same fields of taxation, tax rate increases by one layer of government will reduce taxes collected by the other. Second, if the tax base is mobile, tax rate increases by one regional government will raise the amount of taxes collected by other regional governments. These sources of fiscal interdependence are called in the literature vertical and horizontal tax externalities, respectively. Third, as Smart (1998) shows, if equalisation transfers are present, an increase in the standard equalisation tax rate provides incentives to raise taxes to the receiving provinces. A way to check the empirical relevance of these hypotheses is to test for the existence of interactions between the regional tax rate, on the one hand, and the federal tax rate, the tax rate set by competing regions, and the standard equalisation tax rate, on the other hand. Following this approach, this paper estimates provincial tax setting functions with data on Canadian personal income taxation for the period 1982–1996. We find a significant positive response of provincial tax rates to changes in the federal income tax rate, the tax rates of competing provinces, and the standard equalisation rate (only for receiving provinces). We also find that the reaction to horizontal competition is stronger in the provinces that do not receive equalisation transfers.     

Rent-seeking incentives, corporate political connections, and the control structure of private firms: Chinese evidence

We examine how the rent-seeking incentives of local government motivate private firms¹ listed in China to establish political connections, and whether such connections lead to more concentrated corporate control structures. Our results show that such firms are more likely to establish political connections in regions in which the local economy is less market-oriented or in which the government has more discretion in allocating economic resources. This is consistent with the notion that the presence of incentives for government officials to engage in rent seeking motivates private firms to look for alternative safeguards through political connections. We also find that the controlling owners of politically connected firms tend to concentrate their shareholdings and dominate the board of directors by occupying the position of either chairman or CEO, which supports the conjecture that a concentrated control structure facilitates rent seeking through political connections and allows the controlling owner to retain all of the benefits arising from connections with politicians.     

“十四五”时期促进国内统一市场形成的财税改革思路

在新发展格局中,畅通国内大循环是一个关键任务,而形成国内统一市场又是其中的基础条件。我国作为一个地域面积大、地区差异明显的大国,长期以来实施了向下分权的治理体制,在激发地方的积极性的同时,也不可避免地产生了市场分割的弊端。财税激励是各地方政府采取市场分割策略的主要动因,因此未来需要在税收分成、税制设计、政府间事权等方面进行相应的改革,促进产品和要素在地区间和行业间的自由流动,从而形成统一的国内大市场。     

Markets versus governments

We provide a simple framework for comparing market allocations with government-regulated allocations. Governments can collect information about individuals’ types and enforce transfers across individuals. Markets (without significant government intervention) have to rely on transactions that are ex post beneficial for individuals. Consequently, governments achieve better risk sharing and consumption smoothing than markets. However, politicians in charge of collective decisions can use the centralized information and the enforcement power of government for their own benefits. This leads to political economy distortions and rents for politicians, making government-operated allocation mechanisms potentially worse than markets. We provide conditions under which it is ex ante beneficial for the society to tolerate the political economy distortions in exchange for the improvement in risk sharing. For example, more effective controls on politicians or higher discount factors of politicians make governments more attractive relative to markets. Moreover, when markets cannot engage in self-enforcing risk-sharing arrangements and income effects are limited, greater risk aversion and greater uncertainty make governments more attractive relative to markets. Nevertheless, we also show theoretically and numerically that the effect of risk aversion on the desirability of markets may be non-monotonic. In particular, when markets can support self-enforcing risk-sharing arrangements, a high degree of risk aversion improves the extent of risk sharing in markets and makes governments less necessary. The same pattern may also arise because of “income effects” on labor supply. Consequently, the welfare gains of governments relative to markets may have an inverse U-shape as a function of the degree of risk aversion of individuals.     

The assignment and division of the tax base in a system of hierarchical governments

Vertical externalities, changes in one level of government’s policies that affect the budget of another level of government, may lead to non-optimal government policies. These externalities are associated with tax bases that are shared or “co-occupied” by two levels of government. Here I consider whether co-occupancy of tax bases is desirable. I examine the optimal extent of the tax bases of a lower level of government (local) and a higher level (state). I find that it is optimal to have co-occupancy in the absence of other corrective policies if commodities in the tax bases are substitutes. Further, if the state government can differentially tax the co-occupied segment of the tax base and the segment it alone taxes it will obtain the (second-best) outcome obtained with other policy instruments such as intergovernmental grants.     

Natural Disaster Insurance and the Equity-Efficiency Trade-Off

This article investigates the role of private insurance in the prevention and mitigation of natural disasters. We characterize the equity‐efficiency trade‐off faced by the policymakers under imperfect information about individual prevention costs. It is shown that a competitive insurance market with actuarial rate making and compensatory tax‐subsidy transfers is likely to dominate regulated uniform insurance pricing rules or state‐funded assistance schemes. The model illustrates how targeted tax cuts on insurance contracts can improve the incentives to prevention while compensating individuals with high prevention costs. The article highlights the complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdictions where risk management plans are enforced.     

Designing Intergovernmental Fiscal Relations: Some Insights from the Recent Italian Reform

During the last decade, the Italian system of intergovernmental fiscal relations has been involved in a radical process of reform that is still under way. The reform has assigned Regions new taxing powers and has introduced a new system of interregional transfers. This paper provides a review of the recent reform and offers some tentative answers to the issues still open, relying on a series of simulations and projections. A number of conclusions have been reached. First, when the long‐run performance of the new financing systems is investigated, regional resources may no longer be adequate to meet future health needs. Second, the incentives for active tax policies seem either to prove too weak or even to cause undesirable results. Finally, the complete devolution to the Regions of some significant public expenditure functions risks strengthening the polarisation of financial flows between the Northern and Southern Regions in the long run.     

Testing for Vertical Fiscal Externalities

The purpose of this paper is to design a test of whether the vertical external effects associated with tax base sharing among local and regional governments have become internalized via the intergovernmental transfer system. Such tests are important in the sense that the income tax rates chosen by different levels of government will generally be correlated, even if the resource allocation is optimal from society's point of view. By using panel data for the Swedish local and regional public sectors, the results imply that an increase in the regional income tax rate induces the municipalities in the region to decrease their income tax rates. In addition, we are able to reject the null hypothesis that the vertical external effects have become internalized.