Why are tax revenues of local governments so low?

ABSTRACT

Using a unique data set on federal grants and tax revenues of more than 5000 Brazilian cities, we find that the federal government imposes an implicit tax of almost 10% on city governments’ tax revenues: for every dollar that a city collects from its residents, the federal government withdraws grants worth 9 cents from the city. Our findings suggest that local government tax revenues are low not because federal grants crowd out tax revenues, but because tax revenues crowd out federal grants.

KEYWORDS:

• Local government
• taxation
• federalism

JEL CLASSIFICATION:

• H11
• H41
• H71

Notes

¹ Zhuravskaya (2000), using data for Russian cities, estimates a regression where received federal grants are the dependent, and city tax revenues the independent variable. But, because she is not using lagged city tax revenues, it is not clear to what extent her estimates reflect the effect of higher tax revenues on federal grants, or rather the effect of more federal grants on city tax revenues.