Template-Type: ReDIF-Article 1.0

Author-Name: Carlos A. Vegh 
Author-Workplace-Name: Johns Hopkins University y NBER  


Author-Name: Guillermo Vuletin
Author-Workplace-Name: The Inter-American Development Bank 
 
Title: Unsticking the flypaper effect using distortionary taxation

Abstract: The flypaper effect is a widely-documented puzzle whereby the propensity of subnational governmental units to spend out of unconditional transfers is higher than the propensity to spend out of private income. Building on previous insights in the literature that rationalize this puzzle using costly taxation, we develop a simple optimal fiscal policymodel with distortionary taxation that generates two novel and testable implications: (i) there should be a positive association between the degree of the flypaper effect and the level of the tax rate, and (ii) the flypaper effect should be larger the lower the elasticity of substitution between private and public spending and, in fact, should vanish for very high degrees of substitution. We show that these hypotheses hold for argentinean provinces and brazilian states.

Classification-JEL: H62, H77, H21, H22, H41, H42.
 
Keywords: flypaper effect, distortionary taxation, tax rates, substitutability between private and public spending, congestion of public goods.
Journal: Económica

Pages: 185-237
Volume: 62
Year: 2016
Month: January-December
File-URL: https://revistas.unlp.edu.ar/Economica/article/view/5333/4367
File-Format: Application/pdf
Handle: RePEc:akh:journl:606