Measurement, Determinants and Effects on Country Stability
Studies in Fiscal Federalism and State–local Finance series
Edited by Núria Bosch, Marta Espasa and Albert Solé Ollé
Chapter 8: Federalism and Inter-regional Redistribution
Jonathan Rodden INTRODUCTION 1 Classic theories of federalism envision a community of sovereigns that come together and delegate limited powers to a central government in order to achieve collective goods like common defense, free trade, or a common currency (Riker 1964). In order to solve collective action problems, the federated units often find it necessary to delegate some powers of taxation to the center. For 19th century federations, the centralization of tariffs as part of a drive to create a common internal market was often a driving impetus for the formation of the union. Centralized taxation then opens the door to fiscal redistribution between federated units. Spurred on by World War I and the Great Depression, central governments during the 20th century gained access to forms of direct taxation and tools for inter-provincial redistribution that could not have been imagined by the founders of early confederations. In fact, over the course of the 20th century, some federations have developed a political rhetoric, in some cases enshrined in the constitution, whereby residents of the poorest localities are entitled to the same public services at the same cost as residents of the wealthiest localities. Accordingly, they have developed progressive forms of taxation, direct central government expenditure programs, and intergovernmental grants that transfer resources from taxpayers in wealthy provinces to those in poor provinces. On the one hand, this is not surprising. A workhorse model of political economy suggests that with full-franchise democracy and a right-skewed income distribution, the poor should be able...
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