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Essays on fiscal federalism

Pinheiro De Matos, Luis 2018. Essays on fiscal federalism. PhD Thesis, Cardiff University.
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Abstract

This thesis investigates the effects of pressures brought by increasing capital mobility and interjurisdictional fiscal competition to fiscal policy, focusing particularly on the European Union and the analysis of policy reforms that can be adopted in such contexts. Firstly, the relationship between tax competition and economic growth is re-assessed. In a race to attract mobile capital, jurisdictions compete to offer the highest after-tax rates of return. Governments are driven into the provision of higher levels of productive public goods, and shift their tax structures, towards the taxation of the least mobile factors or least distortive tax bases. In an environment of fixed labour supply, this implies a race to the bottom in capital taxes and a race to the top in the taxes falling on labour. Taking into account the potential effects of fiscal competition on fiscal policy, the consequences of different tax harmonization scenarios are also analyzed. The harmonization of capital taxes leads to a race to the top in taxes on immobile factors. Once tax rates on mobile factors are fixed, tax competition shifts towards immobile factors. This implies that the tax burden falls again disproportionately on labour. Only the harmonization of labour income taxes can avoid this outcome, while leaving room for positive capital income taxes. Secondly, extending this argument within a more detailed model of labour supply calibrated to the EU economy, more detailed policy proposals for a European-wide fiscal harmonization agreement are studied. Labour income and consumption tax harmonization yield potentially better results than capital tax harmonization, as the main fiscal competition-driven government investment distortion, resulting in the over-investment on productive public goods at the expense of merit goods, is minimized. In particular, policy simulation results suggest that indirect taxes, such as value-added taxes, should become a priority instrument for European-wide fiscal reforms. Expenditure side reforms are also necessary, in order to address the race to bottom in the provision of merit goods. Even limited reforms that do not require large increases in the EU budget, such as the introduction of a common European unemployment insurance system, can yield interesting results in a context of interjurisdictional fiscal competition. Thirdly, the cyclical behaviour of fiscal policies across OECD countries is investigated. In i so doing, a more complete picture of fiscal policy can be obtained, by identifying both the short term behaviour of discretionary fiscal policies and long term structural fiscal policy trends. Fiscal policy has become pro-cyclical over recent decades, particularly within the European Monetary Union. The average level of structural fiscal balances and the responsiveness of fiscal policy to the level of debt are found persistently weaker beyond the 70 percent debt-to-GDP threshold, pointing to the relevance of fiscal fatigue episodes. Average fiscal balances and a stronger responsiveness to debt conditions are also found higher at higher levels of the potential level of debt service. This is accompanied by a more pro-cyclical response of the fiscal stance. Finally, the role of fiscal decentralization is also assessed. Two issues remain clear. On the one hand, fiscal decentralization does not appear to directly affect fiscal performance. On the other hand, large intergovernmental transfer systems show a persistent negative relationship with the fiscal stance. Considering the level of sub-national fiscal autonomy also uncovers that this negative effect becomes stronger when sub-national governments have a wide policy scope. These results are found particularly worrying as many OECD countries maintain highly decentralized systems of government, under which large intergovernmental grant systems are kept in parallel with a significant policy scope at the regional and local level.

Item Type: Thesis (PhD)
Date Type: Submission
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Uncontrolled Keywords: public economics; economic growth; fiscal federalism; fiscal decentralisation; tax competition; tax harmonisation; fiscal policy; fiscal reaction functions; panel data analysis
Date of First Compliant Deposit: 25 February 2019
Date of Acceptance: 22 February 2019
Last Modified: 25 Feb 2019 17:22
URI: http://orca-mwe.cf.ac.uk/id/eprint/119783

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