Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 14: Intergovernmental Redistributive Transfers: Efficiency and Equity
Robin Boadway1 Introduction It can be argued that from the perspective of their fiscal policies, governments are primarily institutions for redistribution. Although some of their expenditures could be considered public goods or infrastructure, a large share of them serve redistributive purposes. A pervasive feature of countries with multiple levels of government is the decentralization of policy instruments for redistribution combined with the use of transfers from upper to lower levels of government to achieve redistributive objectives. Subnational governments – whether states or provinces with independent fiscal authority in federations, or regional or local governments in unitary-type countries – assume significant responsibility for providing public services in areas of health, education and welfare, but rely heavily on transfers from the center to finance their spending. The fact that many of these decentralized public services serve important redistributive functions gives these vertical transfers an important equity role per se. But more than that, transfers to subnational governments are also typically highly redistributive horizontally in the sense that they compensate for differences in fiscal capacity of the recipient jurisdictions. This chapter explores the economics of redistributive intergovernmental transfers, their rationale, their effects and their design. Intergovernmental transfers come in a variety of forms. Some are explicitly redistributive in the sense that their amounts are contingent on some characteristic of the recipient jurisdiction, such as its needs for finance or the size of its tax bases. Others are only redistributive when taken together with their financing. Thus, transfers that are equal per capita to all jurisdictions...
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