Reviving Leviathan: Fiscal Federalism and the Growth of Government

  • Rodden J
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This article revisits the influential “Leviathan” hypothesis, which posits that tax competition limits the growth of government spending in decentralized countries+ I use panel data to examine the effect of fiscal decentralization over time within countries, attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation+ First, I explore the logic whereby decentralization should restrict government spending if state and local governments have wide-ranging authority to set the tax base and rate, especially on mobile assets+ In countries where this is most clearly the case, decentralization is associated with smaller government+ Second, consistent with theoretical arguments drawn from wel- fare economics and positive political economy, I show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers+

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  • Jonathan Rodden

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