Horizontal fiscal equity: a theoretical contribution with an application to the portuguese municipalities.

• Author(s): Santos, Ana Bela C.
• Date: 1989
• Persistent ID: http://hdl.handle.net/10400.5/12372
• Origin: Repositório da UTL
• Document Type: Doctoral thesis
• Language: English
• Contributor(s): Repositório da Universidade de Lisboa

Description

Doutoramento em Economia.

One of the main aims of my thesis is to provide a coherent theoretical framework for the economic analysis of fiscal equity in the context of fiscal federalism as well as an empirical application . Having proceeded to a critical assessment of the literature which was found relevant to this subject (chapters 1 and 2), introduce a concept of horizontal equity which is. an alternative to the ones suggested to date. Its· advantage is twofold:(i) on the one hand. it. is a normative concept which is· rooted on the axioms of individual economic behaviour and can thus be included in the: traditional framework of consumer theory· and welfare economics ( ii) on · the other hand. it is shown that it can be translated into operational measures of inequity. Chapter 1 reviews the contribution of various theories to the def'inition of the concept of horizontal equity as the 'equal treatment of equals' . The·approach to fairness as 'envy-free' distributions can provide interesting insights into the definition of horizontal equity in a geographical context. The utilitarian /welfare·approach offers analytical tools which I find useful for measuring horizontal inequity although the paradigm cannot provide any consensus on the definition of horizontal equity nor on the instruments to achieve it. In chapter 2 I give a critical account of the present state of the economic literature on local public finance with reference to the main controversies which have marked its development. This forms the background to the analysis of fiscal equalisation in decentralised fiscal systems (fiscal federalism). In Chapter 3 I introduce my concept of equity as the equal fiscal treatment of equals who live in different local jurisdictions. It distinguishes.between the notion of equity between individuals (the 'individualistic' approach)and the notion of equity between fiscal tiers(the 'organic'or 'regional' approach). The two approaches are discussed with relation to the use o:f equalising grants-in-aid which is the instrument adopted to achieve fiscal equity. The final section (3.4) presents a description of the actual grant-scheme in Portugal with a brief analysis of the fiscaL disparities between local authorities in Portugal. In·chapter 4 alternative measures of horizontal inequity are introduced. The emphasis go es to the normative measures distinguishing between the ones based on the change in the utility (or income)rankings and the ones· based on welfare changes. I argue thatthe latter is more adequate to the measurement of inequity as I have· defined it in this thesis. I show that it is possible to translate my definition of fiscal equity into a normative measure of inequity which can be easily applied to an empirical estimation (given some assumptions). My main objective is to show that it is possible to derive a reference or standard for equalisation whereby one can later evaluatethe true efficacy of a particular grant scheme - in terms of the achievement of a particular objective of equity. Chapter 5 incorporates my particular formulation of the issue of fiscal equalisation in a model of local authorities fiscal behaviour. I assume that local fiscal decisions in the Portuguese municipalities can be represented by a model of public choice based on the hypothesis of the median vote provided that a set of assumptions are made. This hypothesis is tested empirically in chapter 6. The theoretical model enables me to analyse the factors which determine the differences in per capita expenditure levels and tax-prices between local jurisdictions. and obtain an empirical estimation of the parameters required to implement fiscal equalisation. Naturally. any theoretical model is only an attempt to · describe fiscal·behaviour in a .simplified and approximate way; in the context of this thesis it should be regarded as an analytical framework with which one can derive an ideal tax-price equalising grant Nevertheless.the elaboration of an ideal theoretical model is in myopinion very useful in evaluating the extent to which alternative policy measures deviate from a reference situation - assumed to translate the achievement of a clearly defined concept of equity. Chapter 6 centres onthe empirical analysis with data on the Portuguese local authorities. The model described in chapter 5 is used to estimate a demand function for the local public services in Portugal. The empirical estimates of the tax-price and the income elasticities will be essential in the estimation of: (a) a money-metric measure of the existing horizontal fiscal disparities in terms of welfare losses {as defined in chapter 4); (b) the amount of grant which would equalise the average tax-price in every municipality. Using the empirical estimates, I simulate the impact of introducing a scheme which equalises local tax-prices upon local expenditures. Cluster analyses proved to be very useful in analysing all the results for the 275 municipalities ('concelhos') in Portugal (continent, not Madeira and Azores).