Participation funds of the states and their implications on incomes and expenses of the State

Abstract

This work aims to evaluate the effect of the transfer of participation fund on the collection and expenses of Brazilian States. The System-GMM panel data model, for the 27 Brazilian federative units in the period between 1997 and 2013, was used. The results confirmed the existence of the “Oates Veil Hypothesis”, in which the transfers reduce the own collection, that is, the higher the volume of transfers, the lower propensity of governments to collect, considering the level of dependence on taxes. The results indicated that the volume of transfers of PEF received by the states alters their fiscal behavior, stimulates the increase of public spending, and reduces the effort of their own collection.