Geoscience Reference
In-Depth Information
>
>
D
C. As one moves up in the income scale, the desire for redistribution
among this particular subset of citizens declines (
t
∗
→
H
0 as
w
i
→∞
). In addi-
tion, they have no incentive to accept any transfer of their regional tax base
toward the government and citizens of the poorer region (T
0). Thus, they
are better off under a fully decentralized system (D) in which t is kept as low
as possible.
Under these circumstances, their second best option is a system that min-
imizes the centralization of interpersonal redistribution, even if it is at the
expense of side payments to other regions (H). Obviously, the smaller these
side payments the better, as they would optimally like to see T
=
0. Ultimately,
any system that involves sharing the tax base with the poorer region and/or
allowing the poor across the different regions to coalesce in support of redis-
tribution makes them worse off. Therefore, full fiscal centralization (C) would
be their last choice.
Other scenarios emerge depending on the geography of inequality. If a region
is more unequal and only moderately wealthier than the rest of the union, and
provided that the poor are politically engaged, the marginal cost of sharing
nation-wide the burden of redistribution with the rich falls below the marginal
cost of coping with a larger number of poor people under decentralization.
Under these circumstances, the ranking for rich people in the rich region would,
counterintuitively, become C
=
H.
A similar logic applies to rich people in poor regions, though their approach
is driven by the fact that their individual and regional ascriptions do not overlap.
On the one hand, they want to minimize the amount of taxes they pay (
t
∗
→
>
D
>
0
as
w
i
→∞
) and on the other hand, they want to extract as much rent from the
wealthier region as possible (T
0). This combination triggers a dilemma for
this group of citizens. A fully centralized system will liberate them from some
of their fiscal burden. This benefit, however, may be offset by the need to cope
with a larger dependent population, which may result in a scenario in which
the tax burden they face is actually higher. The balance between these concerns
will again be dictated by the skew of the regional distributions of income and
the demands for redistribution emerging from it.
If levels of inequality were moderate, the optimal fiscal structure for richer
citizens in poorer regions would be one that minimizes the central govern-
ment's control over interpersonal redistribution and maximizes redistribution
of resources between regions in a hybrid system (H). This would bridge the
gap in terms of tax bases and increase the amount of resources for both public
goods provision and rent extraction.
Assuming moderate levels of inequality, the worst case scenario for this
subgroup of citizens would be a centralized fiscal design (C) in which they are
exposed to the redistributive demands of a coalition of recipients across the
union that limits the resources at their discretion. Therefore, under moderate
levels of regional inequality, their preferences rank H
>
C. In contrast,
as with wealthier citizens in rich regions, there are circumstances in which the
>
D
>
