Documente Academic
Documente Profesional
Documente Cultură
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Levels of Government
Federal
State
County (called a Parish in Louisiana)
School, Water, Fire, Sanitation District
City, Town, Village
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Grants-in-Aid
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Fiscal Federalism
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Local Public Goods
Local public goods are goods that create
no rivalry to the good within a certain
geographic area.
Examples:
local streets
sewers and sanitation systems
parks
police protection
fire protection
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Providing Local Public Goods Locally
The benefit of providing local public goods with
local tax dollars is that the preferences of the
population using the services can be matched
with their willingness to pay taxes to receive
them.
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Centralized vs Decentralized Decisions
An important problem for a society: which goods
and services should be provided at which level of
government?
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Mobility between Jurisdictions: Voting
with Your Feet
When local public goods are provided in differing amounts
in different communities, citizens can move from one
jurisdiction to another to match their preferences for local
public goods.
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The Global Economy and Federalism
The European Union (EU):
pushed federalism beyond national borders by
agreeing to establish uniform regulations and tax
systems to establish more integrated economies.
eliminated border and customs controls between
member nations.
replaced individual currencies with the Euro
The U.S.
Infrastructure and education have increasingly become
the responsibility of state and local government.
Tax competition among states often limits their ability
to raise revenue
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Interjurisdictional Externalities
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The Theory of Taxation with a
Decentralized System
The Tax Base
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Tax Base Elasticity, Tax Rates and Revenues
Values of ET Changes in Tax Changes in Revenues
Rates t (tB)
ET > –1 An increase in t Revenues increase
(inelastic) A decrease in t Revenues decrease
ET = –1 Either an increase No change in
(Unit elastic) or a Revenues
decrease in t
ET < –1 An increase in t Revenues decrease
(elastic) A decrease in t Revenues increase
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Tax Competition and Tax Exporting
Jurisdictions attempt to lure residents and
business to an area by offering them lower tax
rates or tax abatements. This is called tax
competition. For example, governments issue tax
abatements to industries if they agree to move to
their community.
When jurisdictions place a tax on a good that is
consumed by people who do not live in the
jurisdiction this is called tax exporting. For
example, cities place a hotel tax on visitors to
their communities.
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Fiscal Capacity
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Revenue Effort
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Interstate Tax Exportation
Many state governments do succeed in exporting their tax
burden to residents of other states.
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Governmental Grants
Categorical Grants are grants by one level of government to
another to support a specific program.
Matching Grants are grants by one level of government to
another that must be matched by the receiving government
in support of a program.
Unconditional Grants are grants by one level of government
to another that may be used for any broad purpose.
Sometimes called Block Grants or Revenue Sharing.
Because money not spent in one area when a grant is
received can be spent in another, a restricted grant may
serve unintended purposes. This is called fungibility.
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Federal Grants in Aid
Year Grants as a Percent of
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The Theory of Grants
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Figure 18.1 Political Equilibrium: A Matching Grant
Versus a Nonmatching Grant of Equal Value
Expenditures on Private
G
Goods per Year
A'
A
Slope = – ti(1 – m)
M E
T1 E'
M' {
G Slope = – ti
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Figure 18.2 Matching Grant
A
Cost of Removal per
E E*
10 Grant per Unit
MSC
of Abatement Σ MBN = MSB
8
Σ MBL
Local Cost
per Unit of
Abatement
100 150
Pollution Abated per Year (Thousands of Pounds)
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Education Finance
What is the proper role of the federal
government in school finance? The
question is one of equity vs local control.
Because some school districts are poor
relative to others, a completely local
system could be seen as inequitable. On the
other hand, local control of the curriculum
is seen as important as well.
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