No. 6/2005
DECENTRALIZATION WITH PROPERTY TAXATION
TO IMPROVE INCENTIVES: EVIDENCE FROM LOCAL GOVERNMENTS’ DISCRETE CHOICE
Fiva, Jon Hernes
Rattsø, Jørn
Abstract:
Decentralization of government with property tax financing is the
standard recipe for public sector reform. Fiscal competition is assumed
to stimulate efficiency and hold down the tax level. Property taxation
offers additional incentives for efficiency. We study the incentive mechanisms
involved using data for decentralized governments and in a setting where
they can choose to have property taxation or not. The empirical analysis
addresses whether fiscal competition and political control problems influence
the choice of having property taxation. The results indicate that both
incentive mechanisms are relevant and consequently support the standard
advice. Fiscal competition generates a distinct geographic pattern in
local taxation and political fragmentation seems to motivate property
taxation to control common pool problems. The main methodological challenge
handled concerns spatial interaction with discrete choice.
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