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We construct an empirically informed computational model of fiscal federalism, testing whether horizontal or vertical equalization can solve the fiscal externality problem in an environment in which heterogeneous agents can move and vote. The model expands on the literature by considering the case of progressive local taxation. Although the consequences of progressive taxation under fiscal federalism are well understood, they have not been studied in a context with tax equalization, despite widespread implementation. The model also expands on the literature by comparing the standard median voter model with a realistic alternative voting mechanism. We find that fiscal federalism with progressive taxation naturally leads to segregation as well as inefficient and inequitable public goods provision while the alternative voting mechanism generates more efficient, though less equitable, public goods provision. Equalization policy, under both types of voting, is largely undermined by micro-actors' choices. For this reason, the model also does not find the anticipated effects of vertical equalization discouraging public goods spending among wealthy jurisdictions and horizontal encouraging it among poor jurisdictions. Finally, we identify two optimal scenarios, superior to both complete centralization and complete devolution. These scenarios are not only Pareto optimal, but also conform to a Rawlsian view of justice, offering the best possible outcome for the worst-off. Despite offering the best possible outcomes, both scenarios still entail significant economic segregation and inequitable public goods provision. Under the optimal scenarios agents shift the bulk of revenue collection to the federal government, with few jurisdictions maintaining a small local tax.

About the Authors -- Introduction -- Chapter 1 Time for Regional Areas to Incorporate Management Perspectives in Pursuit of a Sustainable Society -- Chapter 2 Overview of Hometown Tax Donation and the Challenge It Poses to Municipal Administration—Paradigm Shift in Municipal Administration: Incorporating Management Perspectives -- Chapter 3 Effects of Fostering Local Businesses and Measures for Enhancing Business Capabilities: —Based on Case Studies on Hometown Tax Donation Gift Providers -- Chapter 4 1 With a View Toward Initiating Regional Entrepreneurship—Based on Data Analysis and Survey Research of Hometown Tax Donation Gift Providers -- Chapter 5 Prospects for Regional Financial Institutions to Enhance Their Roles Through Hometown Tax Donation—Current State of Lending by Regional Financial Institutions and of Intra-regional Industry-Government-Banking Collaboration.-Chapter 6 1 Regarding Measures by Rural Areas to Promote Migration and Settlement and Increase Associating Populations—Implications from Various Measures Triggered by Hometown Tax Donation -- Chapter 7 The Role of Social Finance in Resolving Regional Issues—Recent Trends in Japanese Civic Crowdfunding -- Chapter 8 Implications for Regional Development Drawn from the Hometown Tax Donation System—Aiming to Produce Regional Entrepreneurship.

This paper reveals a noticeable difference between a high degree of progressivity of incomerelated local property tax relief versus the proportional or regressive incidence of recognition tax relief. Recognition tax relief is tax relief given to specified social sectors which recognizes either their contributions to society or their identity-related suffering. Social groups that are characterized by political power and positive image following social construction process are expected to receive more favorable tax treatment regardless of their material needs. This study advances our understanding by showing that the degree of progressiveness of a tax system is shaped by social construction which implies a more complex trade-off between equality, efficiency and social construction in designing the tax system.

A large literature on the 'flypaper effect' examines how federal grants to states at time period t affect state spending (or taxes) at time period t. We explore the fundamentally different question of how federal grants at time period t affect state tax policy in the future. Federal grants often result in states creating new programs and hiring new employees, and when the federal funding is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes. Government programs tend to be difficult to cut, as goes Milton Friedman's famous quote about nothing being as permanent as a temporary government program, suggesting that it is likely that temporary federal grants create permanent (future) ratchets in state taxes. Far from being purely an academic question, this argument is why South Carolina's Governor Mark Sanford attempted to turn down federal stimulus monies for his state. We examine both the impact of federal grants on future state budgets and how federal and state grants affect future local government budgets. Our findings confirm that grants indeed result in future state and local tax increases of roughly 40 cents for every dollar in grant money received in prior years. Adapted from the source document.

Debates the main proposals for giving back to the communes greater fiscal autonomy. (Abstract amended)