Fiscal Federalism

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Fiscal Federalism

• Topic Eleven

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Centralization ratio

• Percentage of total government expenditures made
  by the Federal Government
• Canada 42
• U.S.A 53
• Germany 59
• Australia 60
• UK 78
• France 82

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Implications

• High ratios
• Higher standardization
• Higher central government power
• More intrusion into life
• Underestimate
• High degree of control of local govt use of
  their own funds
• Overestimate
• Block grants to lower govt regimes
• Few restrictions on spending

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Trends

• Governments seem to be offloading
• Responsibilities
• Taxing authority
• Shares Canada
• Federal around 40
• Provincial around 40
• Local around 20

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Public goods

• Are goods public goods because they are provided
  by the government
• Book seems to imply this with its use of the
  phrase
• Government provides both public goods and normal
  goods
• Private markets provide both public goods and
  normal goods
• Use strict definition of public good
• Non-rivalrous
• Non-exclusionary

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Tiebout model

• Government supplies a set of goods and efficient
  markets for these sets constrained by
• Large choice set of communities
• Perfect mobility
• Perfect information
• No externalities
• Cost/unit output is constant
• Proportional property taxes
• Exclusionary zoning

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Large choice set

• Many buyers sellers (perfect competition)
• Choice sets
• Taxes, services, location, schools, zoning
• Avalon
• St. Johns
• CBS
• Paradise
• Torbay
• Mount Pearl
• Portugal Cove/St. Phillips

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Perfect mobility

• Subset of transactions costs (perfect
  competition)
• Migration
• Implies more efficient distribution of labor
• Mobility costs must be very low
• Costs of moving
• Costs of housing
• Property taxes

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Perfect Information

• Same assumption (perfect competition)
• Easy access to information
• Tax regime
• Set of services
• Poor access to information
• Managerial style
• Strategic vision

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No externalities

• Subset of transaction costs (perfect competition)
• Intergovernmental externalities
• Taxing
• Living in CBS
• Earning living in St. Johns
• Roads, building maintaining
• Provincial responsibility
• Congestion
• Pollution

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Cost/unit output constant

• Efficient pricing
• Different contracts
• Snowclearing
• Mt. Pearl/St. Johns
• Schools

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Proportional property taxes

• Property taxes
• Differ from regime to regime
• Fines
• Fees

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Exclusionary zoning

• Change the character of a public good?
• Zoning
• Affects property rights
• Changes as zoning changes
• Sobeys, Dominion
• Neighborhood rules
• Gated communities

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Tiebout model Federal competition

• The above assumptions lead to competitive
  governments
• Each government creates an unique set of
  characteristics
• Canada
• Different from both Europe U.S.A.
• Less crime
• Fiscally responsible government
• Publicly provided health care
• Less social differentiation
• Publicly funded arts infrastructure

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Tiebout model Provincial competition

• Alberta
• Lower taxes (income and sales)
• Lower business taxes
• Higher levels of services
• Better business regulatory environment
• Better management
• Alberta, Newfoundland, Ontario?

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Tiebout model laboratories

• Health for fee
• Alberta, Ontario, Quebec
• Childcare
• Quebec, British Columbia
• Education
• Ontario

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Federal Government Responsibilities

• Discretionary powers
• Few through taxes and expenditures changes
• Atlantic Accord
• Automatic stabilizers
• EI (pymts increase in recessions)
• Taxes (decrease in recessions)
• Monetary policy (leads to lower inflation and
  interest rates in recessions)
• Social assistance

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Federal Government Responsibilities

• Regulation of private markets to assign property
  rights
• Health
• Drugs, producers also have property rights to
  side affects
• Safety
• Contractors have property rights which include
  safety issues
• Airbags
• Financial markets
• Government intervenes to assign property rights
  to investors to proprietary information about the
  firms

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Federal Government economies of scale

• Efficiency in one bureaucracy
• Revenue Canada
• Externalities
• Education (large federal funding component)
• Newfoundlanders going to Alberta, Ontario, etc.
  after getting degree
• Paying taxes elsewhere
• Producing wealth elsewhere

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Pigovian taxes and subsidies

• Affect behavior
• Change property rights to tax pollutants
• Equalize property rights
• Subsidize education
• Primary
• Secondary
• Income transfers
• Provincially (equalization)
• Individually (social insurance)

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