The stimulative effects of intergovernmental grants and the marginal cost of public funds

Abstract

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Taxpayers' Behavior and the Flypaper Effect

“…Therefore, under this set of assumptions B * t < 0 is a sufficient condition for the flypaper effect. According to (11) the size of the flypaper effect increases with the MCF (equal to u G /u X ), a result that confirms the conclusion of Dahlby (2011) and Dahlby and Ferede (2016). However, in contrast to these studies, condition (11) implies that the flypaper effect can also be obtained when B * t and the MCF are constant.…”

“…The reason is that behavioral responses usually result in that a given amount of income is lost before being made available to the government, while the same amount of transfers is readily available without costs. This implies that the flypaper effect does not require the MCF to be increasing in the tax rate, as the previous literature has claimed (Hamilton, 1986;Dahlby, 2011;Dahlby and Ferede, 2016). The flypaper effect can be obtained with a constant MCF, and the relevant condition is that the MCF must be greater than one.…”

“…Related papers in the literature have mostly focused on the costs of taxation to explain the flypaper effect (Hamilton, 1986;Dahlby, 2011;Aragón, 2013;Dahlby and Ferede, 2016). In order to clearly identify the effects of the income tax rate on the flypaper effect, and considering that the empirical literature finds no convincing evidence of big or significant income effects of labor supply and taxable income Saez et al, 2012), it is assumed that B * Z = B * tZ = R Z = 0 and thus X Z =1.…”

“…The empirical literature on the flypaper effect provides numerous estimates of the effect of intergovernmental transfers on public expenditures. Most studies find that the coefficient of intergovernmental transfers is positive and lower than one (see, for instance, Levaggi and Zanola, 2003;Sour 2013;Dahlby and Ferede, 2016; and the survey in Gamkhar and Shah, 2007). Some studies, however, have found that the same coefficient can be higher than one.…”

Catalytic effect of capital transfers in a federal context: the case of Spanish regions

“…There is also ample literature that analyses the distorting effects of grants: the flypaper effect, which refers to the assumption that increases in equalizing transfers tend to stimulate more spending than do comparable increases in local tax revenues (Gramlich, 1977;Hines and Thaler, 1995;Gamkhar and Shah, 2007;Faber and Koning, 2012;Pevcin, 2014;Dahlby and Ferede, 2016), and the fungibility effect, that occurs when a jurisdiction receives a conditional transfer and diverts resources to other purpose, i.e. reducing taxes (crowding-out effect), debt or the current deficit; increasing current spending; or even mismanagement of these resources (Bradford and Oates, 1971;McGuire, 1975;Zampelli, 1986;Islam, 1998;Ulbrich, 2011;and Alegre, 2012).…”