Fiscal Institutions and the Size and Inter-Regional Distribution of Public Redistribution
| Autor | Raúl Alberto Ponce Rodríguez - Juan Medina Guirado |
| Cargo | Universidad Autónoma de Ciudad Juárez - Universidad Autónoma de Ciudad Juárez |
| Páginas | 1-42 |
Ensayos Revista de Economía, 37(1), 1-42, Mayo 2018
ISSN Electrónico: 2448-8402 | ISSN Impreso: 1870-221X
©2018 Los autores
UANL
UNIVERSIDAD AUTÓNOMA DE NUEVO LEÓN FACULTAD DE ECONOMÍA CENTRO DE INVESTIGACIONES ECONÓMICAS
Fiscal Institutions and the Size and
Inter-Regional Distribution of Public
Redistribution
Instituciones Fiscales y el Tamaño y Distribución Inter -Regional
de la Redistribución Pública
Raúl Alberto Ponce Rodríguez*
Juan Medina Guirado**
Article information
Abstract
Received:
14 October 2016
Accepted:
20 December 2017
Fiscal institutions, which are responsible for the
delegation of tax and spending po wers among
different tiers of governments, are important
determinants of the size and efficiency of public
redistribution. In this paper we develop a
comparative analysis of the impact of fiscal
decentralization vis-à-vis tax revenue sharing on
the government’s effort to redistribute income.
The main findings are: first, the size of the
national budget for public redistribution is the
same under fiscal decentralization and tax
revenue sharing. Second, different fiscal
institutions lead to different regional distributions
of public transfers. Third, when choosing between
decentralization and tax revenue sharing, there is
a tradeoff between the efficiency and the regional
effort of the government to redistribute income.
JEL Classification:
H72; H23; H1
Keywords:
Redistribution; Inter-
regional externalities;
Federalism; Structure
and scope of
government
*Universidad Autónoma de Ciudad Juárez, Instituto de Ciencias Sociales y Administración,
Heroico Colegio Militar y Av. Universidad No. 3775, Zona Chamizal, 32310, Ciudad
Juárez, Chihuahua, México. Tel: 52-656-688-3837. rponce@uacj.mx
**Universidad Autónoma de C iudad Juárez, Instituto de Ciencias Sociales y
Administración. : juan.medina@uacj.mx
®
ensayos.uanl.mx
Facultad de
Economía
Ponce y Medina / Ensayos Revista de Economía, 37(1), 1-42
2
Información del
artículo
Resumen
Recibido:
14 octubre 2016
Aceptado
20 diciembre 2017
Las instituciones fiscales, que deter minan la
responsabilidad del diseño de impuestos y gasto
entre los diferentes niveles de gobierno, son
importantes determinantes del tamaño y eficiencia
de la r edistribución pública. En este artículo, se
desarrolla un análisis comparativo del impacto en
el esfuerzo del gobierno por redistribuir el
ingreso, entre la política de descentralización y la
de compartir el ingreso fiscal. Los principales
resultados son: primero, el tamaño del
presupuesto en redistribución es el mismo para
una economía con descentralización y en la que se
comparte el ingreso fiscal. Segundo, las
instituciones fiscales implican una asignación
diferente en la distribución regional de
transferencias públicas. Tercero, al escoger entre
descentralización y compartir el ingreso fiscal, se
observa un intercambio entre la eficiencia y la
distribución regional de las transferencias
públicas.
Clasificación JEL:
H72; H23; H1
Palabras Clave:
Redistribución;
Externalidades inter-
regionales;
Federalismo; Estructura
y alcance del gobierno
Introduction
For an economy with multiple tiers of government, misallocations of tax and
spending policies might arise due to coordination failures among different
levels of government. In particular, it is well known that a problem of tax
coordination could induce vertical (see Keen 1998 and Wilson 1999) and
horizontal tax externalities (see Devereuxa et al 2007, among others).
Uncoordinated tax policies lead to horizontal fiscal externalities when
subnational governments do not recognize that their tax policies affect the tax
base of neighborhood districts. This, in turn, could induce state and local
governments to overestimate the marginal cost of public funds leading to
sub-optimal levels of state and local taxation and spending (see Wilson,
1999). Coordination failures also lead to vertical fiscal externalities because
the central government does not take into account how its tax policies affect
sub-national tax bases and state and local governments also do not take into
account how local taxes affect the tax base o f the central government. In this
case, all levels of government would underestimate the marginal costs of
public funds associated with raising tax revenue leading to high taxation and
spending (see Johnson 1988, Boadway and Keen 1996).
Ponce y Medina / Ensayos Revista de Economía, 37(1), 1-42
3
Several solutions have been explored to solve the problem of coordination
failures for economies with multi-le vel governments: one possibility is to
centralize tax and spending decisions. However, fiscal centralization could
actually reduce the national social welfare because the ce ntral government
might be less efficie nt than state or local governments in differentiating local
taxes a nd spending according to the inter-regional heterogeneity of
preferences (see Oates 1972, Ponce et al 2012). Another possibility is to
centralize tax policies but decentralize spending decisions.1 In fact, several
countries in the world use some form of tax revenue sharing, a policy that
seeks to coor dinate tax policies from sub -national governments and the
central government, to avoid the negative effects associated with failures of
coordination in a federation (see Rao 2007, Kochi and Ponce 2016).
Mexico is one of the countries that have adopted some form of tax revenue
sharing as a way to coordinate tax policies fro m the central and state (same as
above) governments. In the particular case of Mexico, the central and state
governments signed an agreement to coordinate tax policies in which the
central government collects tax revenue that is later distributed among
different levels of governments.2
Although there is a large amount of literature that studies the relative merits
of fiscal decentralization versus centralization (see Martinez-Vazquez et al
2015 among many others). To the best of our knowledge, there has been little
research on the comparative advantages and disadvantages of adopting
different fiscal institutions such as fiscal decentralization (in which tax and
spending powers are given to sub-national governments) vis-à-vis a tax
revenue sharing agreement in which taxation powers are delegated to the
central government and (some) spending powers remain at the state level.
Since the c hoice of fiscal institutions affects the provision of local public
goods, the effort of the government to redistribute income, fight poverty, and
provide important programs such as education and health services that are
vital for the citizens´ well-being, it is relevant from a policy making point of
view, to have a better understanding of the advantages and shortcomings of
these two fiscal institutions.
In this paper we seek to fill in this gap of the literature by developing a
comparative analysis of the size and inter-re gional distribution of public
transfers that would arise under two fiscal institutions: fiscal decentralization
1 This fiscal institution also has many critics, who argue that such arrangement reduces
local accountability and impair the representation of the household’s preferences into local
policy (see Martinez-Vazquez et al 2015).
2 The law of fiscal coordination in México was first implemented in 1978. The ob jective of
this law is to coordinate the fiscal system in the Mexican federation to establish the
participations of federal income to be allocated to Mexican state governments and
municipalities. See http://www.diputados.gob.mx/LeyesBiblio/pdf/31_180716.pdf.
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