Does subnational tax autonomy promote regional convergence? Evidence from OECD countries, 1995–2011

ABSTRACT

This paper investigates the simultaneous impact of subnational tax autonomy and vertical transfers on regional disparities of gross domestic product (GDP) per head in a sample of 30 Organisation for Economic Co-operation and Development (OECD) countries over the period 1995–2011. Autonomously raised tax revenue as well as vertical transfers are shown to be potential drivers of regional convergence, although the negative marginal impact of transfers on disparities decreases and eventually turns positive as subnational governments are more transfer dependent. The results indicate that subnational tax autonomy should be sufficiently broad to allow less developed regions to expand their own revenue base and to catch up with their more developed counterparts.

KEYWORDS:

• subnational tax autonomy
• fiscal decentralization
• regional disparities

JEL:

• H71
• H77
• R12

ACKNOWLEDGEMENTS

The author is indebted to three anonymous referees for their constructive suggestions. He also acknowledges the valuable comments by Geert Dhaene.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

Notes

1. At the start of the empirical research in early 2016, a consistent data set for the 30 OECD countries could only be constructed with the time span 1995–2011.

2. The standard error of the marginal impact of Tax on CV evaluated at the sample mean of Transf, for example, amounts to 0.0178, implying a 10% confidence interval ranging from −0.024 to 0.022 (Brambor et al., 2005).

3. A quadratic specification of Tax yielded insignificant parameter estimates.

4. The parameter estimates of cubic specification of GDP were highly insignificant.