Economic Risk and Political Risk in Fiscal Unions |
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Authors: | Alberto Alesina & Roberto Perotti |
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Institution: | Harvard University, NBER and CEPR,;Columbia University and CEPR |
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Abstract: | A fiscal programme that redistributes income from rich to poor individuals indirectly redistributes tax revenues from regions hit by a favourable shock to regions hit by an unfavourable one. Centralised fiscal redistribution has therefore been advocated as a way to insure individuals against region-specific shocks. In this paper, we argue that a centralised fiscal policy, while reducing the uncertainty on the tax base, may create additional uncertainty on the tax rate. Using a simple model we show that the higher uncertainty on the policy instrument might more than offset the lower uncertainty on the tax base. |
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