Fiscal Federalism-Decentralisation and the size of government

Table of Contents

1. Introduction

2. Definitions

2.1 Definition of Fiscal Federalism

2.2 Definition of Fiscal Decentralisation and Fiscal Centralisation

3. Fiscal Federalism in Austria

3.1 Decentralisation in Austria compared to other OECD countries

4. Theoretical Perspectives on Fiscal Federalism

4.1 First Generation Theory of Fiscal Federalism

4.2 Public-Choice Perspective of Fiscal Federalism

4.3 Second Generation Theory of Fiscal Federalism

4.3.1 Centralization and Decentralisation in the Second Generation Model

4.3.2 Potential dangers of Fiscal Decentralisation

4.3.3 Risk- Sharing and Interjurisdictional Insurance

4.4 Conclusion

5. Fiscal decentralisation and size of the government

5.1 Introduction

5.2 The Leviathan hypothesis

5.2.1 Empirical studies on the Leviathan hypothesis

5.2.1.1 The control variables

5.2.1.2 The original test

5.2.1.3 The inseparability of taxing and spending decision

5.2.1.4 Evidence from Swiss state and local governments

5.2.1.5 References on panel data of 18 OECD countries

5.2.1.6 References on panel data of 29 OECD countries

5.2.2 Summary and Conclusion

5.2.3 Critical assessment on the empirical tests

5.2.3.1 Conclusion

5.3 Tax competition

5.3.1 Introduction

5.3.2 Definition of tax competition

5.3.3 Tax competition and output of local public goods

5.3.3.1 Summary

5.4 Local benefits with federation-wide costs

5.4.1 Introduction

5.4.2 The model

5.4.2.1 Summary

5.4.3 A simplification of the model

5.4.4 A model of tax sharing and tax illusion

5.4.4.1 Summary

5.4.5 Conclusion

6. Conclusion

Research Objectives and Core Themes

The primary objective of this thesis is to examine the impact of fiscal decentralization on the overall size of government. By analyzing various politico-economic mechanisms, the paper investigates whether a decentralized tax system effectively constrains government growth compared to a centralized system, while specifically addressing the Austrian fiscal framework.

• The relationship between the degree of centralization and government size.
• The validity of the "Leviathan hypothesis" within empirical frameworks.
• Theoretical foundations of First and Second Generation Fiscal Federalism.
• Mechanisms of tax competition and its impact on public good provision.
• Models of political economy, including lobbying, pork-barrel spending, and tax illusion.

Excerpt from the Book

Summary of Chapters

1. Introduction: Outlines the core research questions regarding the efficiency of tax systems and the correlation between centralization and government size.

2. Definitions: Defines the fundamental concepts of fiscal federalism, fiscal decentralization, and fiscal centralization within the context of economic literature.

3. Fiscal Federalism in Austria: Describes the structure of the Austrian federal state and the specific vertical and horizontal fiscal equalization mechanisms.

4. Theoretical Perspectives on Fiscal Federalism: Provides an overview of the First and Second Generation Theories of fiscal federalism, focusing on public choice and asymmetric information.

5. Fiscal decentralisation and size of the government: Investigates the Leviathan hypothesis, tax competition, and models of political behavior in centralized vs. decentralized settings.

6. Conclusion: Synthesizes the findings from the different theoretical and empirical approaches discussed throughout the thesis.

Keywords

Fiscal Federalism, Fiscal Decentralization, Leviathan Hypothesis, Tax Competition, Public Choice, Government Size, Tax Illusion, Political Economy, Austria, OECD, Local Public Goods, Vertical Fiscal Equalization, Horizontal Fiscal Equalization, Welfare Maximization, Public Expenditure.

Frequently Asked Questions

What is the core focus of this research?

The research focuses on the economic and political mechanisms that link the level of tax system centralization to the overall size of government.

What are the primary themes discussed in this thesis?

Central themes include the Leviathan hypothesis, tax competition, fiscal decentralization, models of political lobbying, and the specific application of these theories to the Austrian fiscal system.

What is the main research question?

The thesis asks whether a decentralized tax system leads to a smaller size of government compared to a centralized one and which politico-economic mechanisms drive this correlation.

Which scientific methods are employed?

The paper utilizes a literature-based comparative analysis of empirical models (OLS, 2SLS, GLS) used by various economists to test the Leviathan hypothesis across different datasets.

What does the main body cover?

It covers theoretical frameworks (First and Second Generation theories), an empirical review of the Leviathan hypothesis, an analysis of tax competition, and a modeling section on tax sharing and tax illusion.

What are the defining keywords of this study?

Key terms include Fiscal Federalism, Leviathan Hypothesis, Tax Competition, Public Choice, and Government Size.

How does the Austrian system compare to other OECD countries?

The thesis highlights that Austria is highly centralized, with a very low degree of sub-central tax autonomy compared to other OECD nations.

What is the concept of "tax illusion" as defined in the models?

Tax illusion refers to a behavioral component where provincial governments undervalue the tax burden on their citizens because the taxes are collected centrally, leading to an overprovision of local public goods.

Why is there no consensus on the Leviathan hypothesis?

The consensus is missing because studies utilize different datasets, varying time periods, diverse estimation methods, and a wide range of control variables, making direct comparisons difficult.