An analysis of theoretical and applied issues in fiscal federalism and local public economics

Abstract

This Thesis is a study of theoretical and applied issues in fiscal federalism and local public economics. The main theoretical issues to be examined include: (i) the welfare and provision implications of local public good externalities; (ii) the break-down of neutrality of lump-sum transfers when regions generate externalities and have different populations and marginal costs; (iii) the fly-paper effect; (iv) the inducement for independent political entities to federate; (v) the rationale for redistributional transfers and the importance of certain federal institutions; (vi) tax competition and tax exporting; and (vii) the implications of considering the interaction between free internal migration and public good externalities in federal economies. The applied issues relate to Australian fiscal federalism where two questions are analysed. They are: (i) why has Australia developed distinctive equalising procedures and institutional mechanisms for transferring income between states? and (ii) why has there been a relatively extreme degree of centralisation of taxation powers? Although there are many ideas to emerge from the Thesis, three of the main conclusions are: (i) there may be benefits for independent political entities to cooperate in the provision of public goods and taxation of citizen-voters; (ii) diversity of preferences constrains the degree to which such cooperation may occur by imposing 'uniformity' costs on some of the participants in cooperative behaviour; and (iii) an important role for income transfers and institutional mechanisms in federal systems is to redistribute these costs and benefits to make cooperative behaviour more attractive.