Tax decentralization and public deficits in OECD countries

Abstract

This article explores the effect of sub-national tax autonomy and sub-national control over shared taxes on primary deficits with panel data for 23 OECD countries over the 1975-2000 period. The results suggest that sub-national tax autonomy has a U-shaped effect on primary deficits. We find that the “average” country in the sample could increase the fiscal stability of its public sector by reducing sub-national tax autonomy. There is also some indication that subnational control over shared taxes increases fiscal stability, but we obtain this result only if Belgium and Spain are included in the sample.Tax decentralization, Public deficits, Fiscal instability