L18: State and Local Public Finance Flashcards

1
Q

three primary factors behind the change in the composition of government spending

A

16th amendment allowed the federal government to levy income taxes on citizens

new deal programs of 1930s in response to great depression

introduction of social insurance and welfare programs

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2
Q

optimal fiscal feeralism

A

question of which activities should take place at which level of government

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3
Q

state/local government vs federal spending

A

spending on things like education and public safety primarily at state and local level

large old age entitlement programs and national defense provided federally

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4
Q

state government revenue

A

sales and income taxes primarily

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5
Q

local government revenue

A

property taxes (about 1/2)

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6
Q

tiebout model

A

variation in levels of public goods and services by local governments can lead to optimal provision

people choose where to live based on the attributes available - substitutes for the market in the same way a market works in providing signals

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7
Q

tiebout model assumptions

A

people are perfectly mobile across towns

people have full information on taxes and benefits

local public goods are rival goods beyond some population level

enough towns so individuals can sort themselves into goods with similar public goods preferences

residents pay uniform tax

no externalities/spillovers

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8
Q

tiebout theorem

A

if all assumptions are satisfied, competition leads to optimal provision of public goods

people move freely and pick their preferred locality
- people with similar tastes end up together

public goods provision mimics characteristics of private goods provision

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9
Q

tiebout equilibrium

A

each town has people who have the same desired level of the public good and pay the same amount of it

public goods provision is efficient - samuelson rule holds
- also lindahl prices since identical tastes

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10
Q

limits of the tiebout model

A

doesn’t hold for public goods where it is efficient to keep adding individuals in, like national defense

doesn’t hold when there are spillovers

local governments don’t use lump sum taxes

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11
Q

mechanisms that affect property taxes

A

zoning

housing prices
- valuable public goods cause housing prices to go up

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12
Q

implications of the tiebout model: capitalisation of fiscal differences in house prices

A

differences in public goods and taxes should be reflected in house prices, since these attributes are associated with living in a jurisdiction

high property taxes relative to public goods quality depresses housing prices, low property taxes relative to public goods quality should increase housing prices

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13
Q

tiebout model and optimal fiscal federalism

A

tax-benefit linkages
- goods with strong tax benefit linkages should be provided locally

cross-municipality spillovers
- if local public goods have large spillover effects on other communities, the goods will be underprovided by any locality

economies of scale
- public goods with large EOS are not efficiently provided by many competing local jurisdictions

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14
Q

redistribution across communities

A

high level governments (federal and state) can redistribute directly to individuals, but also can do so indirectly through intergovernmental grants

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15
Q

types of grants

A

matching
- amount is tied to the amount of spending by the local community

block
- grant of some fixed amount with no mandate on how it is to be spent

categorical block grant
- grant of some fixed amount with a mandate that the money be spent in a particular way

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16
Q

implications of different grant types

A

matching
- acts like a subsidy and helps with externalities, since they are targeted

block
- shifts out the BC and raises spending on goods
- good for redistribution

categorical block
- differ from block only if the amount of the grant is greater than initial spending