NONLINEAR INCOME TAXATION AND MATCHING GRANTS IN A FEDERATION WITH DECENTRALIZED IN‐KIND TRANSFERS* |
| |
| Authors: | Sören Blomquist Luca Micheletto |
| |
| Affiliation: | 1. Uppsala University, Sweden;2. University of Milan and Bocconi University, Italy;3. An earlier version of this article circulated under the title “Redistribution, in‐kind transfers and matching grants when the federal government lacks information on local costs.” We would like to thank three anonymous referees for their valuable comments and suggestions. We would also like to thank, for their comments, Thomas Aronsson, Robin Boadway, Massimo Bordignon, Luciano Greco, Marko Koethenbuerger, seminar participants at University of Uppsala, Catholic University of Milan, University of Padova, the PET 2004 conference in Beijing, the IIPF 2004 conference in Milan, the 2004 Nordic Workshop on Tax Policy and Public Economics in Helsinki, the 2005 Encuentro de Economia Publica in Palma de Mallorca, the 2005 Workshop on Fiscal Federalism in Barcelona, and the 2005 World Congress of the Econometric Society in London. Usual disclaimer applies. Please address correspondence to: S?ren Blomquist, Uppsala University, Department of Economics, Box 513, Uppsala, 751 20 SWE, Sweden. Phone: +46 18 471 1102. Fax: +46 18 471 1478. E‐mail: . |
| |
| Abstract: | We extend to a fiscal federalism setting the literature on redistributive in‐kind transfers in the presence of nonlinear income taxation. Local governments have a cost advantage, motivating decentralization of the in‐kind transfer. The cost structure varies across regions, and the central government cannot observe which region is which. We show that decentralized in‐kind transfers can, in this setting, be an even more important instrument for relaxing self‐selection constraints, thus, helping redistribution, than in single‐government models. We characterize the optimal marginal tax rates and matching grants. The grants have a very different structure than the one derived in earlier studies. |
| |
| Keywords: | |
|
|
