Income distribution and fiscal decentralization

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This study considers the effects of fiscal decentralization on income distribution and resource allocation. First, we examine the redistributive consequences of fiscal decentralization in Japanese local public finance. To analyze this issue, we employ the concepts of multivariate majorisation. The policy implications obtained here as follows : a) the reform should be focused upon the improvement of efficiency ; and b) the reform regarding with the allocation of grants will be more desirable than the devolution of taxes. Second, we try to find the optimal formula of the Local Grant Tax. It is shown that the allocation formula proposed here can reduce both disincentive and re-ranking effects, achieving the equalization of fiscal capacity. Third, we try to analyze fiscal coordination where local governments provide the public consumption goods and public inputs in which both benefits of public inputs and public consumption goods spill over to other regions. The main results are the following : a) it may be possible to have under-provision of both public inputs and consumption goods ; b) there exists Pareto improvement from changing the pattern of public spending ; and c) each region may benefit from increasing the public inputs and reducing the public consumption goods, where both public goods have high externalities. Finally, we analyze the welfare effects of policy coordination of tariffs, commodity taxes and production subsidies under an imperfect competition. In particular, we investigate the effects of partial coordination : while the member countries agree to coordinate only one of their policy variables, they can still use other policy variables as strategic devices. We show that the simultaneous reduction of tariff can achieve the strictly Pareto improvement. On the other hand, the warfare effects of partial coordination related to the commodity taxes and production subsidies depend on the production technology of firms and the preference of the consumers.