OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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Fiscal decentralisation and income inequality

Empirical evidence from OECD countries

This paper investigates the relationship between fiscal decentralisation and economy-wide disposable income inequality. Drawing on a dataset of up to 20 OECD countries over a period from 1996 to 2011, a regression analysis is performed, relating several indicators of national income inequality and a wide array of fiscal decentralisation indicators. The results indicate a weak, inequality-reducing relationship between decentralisation and income inequality, as measured by the Gini coefficient, but the effect is rather small and unstable across specifications. Fine-graining the analysis by using income percentile ratios, in turn, produces more significant and stable results. It shows that the effects of fiscal decentralisation are not the same along the income distribution. While decentralisation tends to be associated with a reduction in income inequality between high incomes and the median, it is linked to a divergence of low income groups from the median, notably via sub-central tax autonomy. Transfers between levels of government also tend to increase the gap between lower and middle incomes. Interpreting these effects jointly, it seems that mainly middle income earners benefit from fiscal decentralisation. Finally, some insights on decentralisation and regional income inequality are presented. At first sight, fiscal decentralisation does not seem to be associated with income sorting in large jurisdictions, but a more fine-grained analysis is required to answer this question.


Keywords: regional inequality, tax autonomy, intergovernmental transfers, fiscal decentralisation
JEL: D63: Microeconomics / Welfare Economics / Equity, Justice, Inequality, and Other Normative Criteria and Measurement; I38: Health, Education, and Welfare / Welfare, Well-Being, and Poverty / Welfare, Well-Being, and Poverty: Government Policy; Provision and Effects of Welfare Programs; H10: Public Economics / Structure and Scope of Government / Structure and Scope of Government: General; H70: Public Economics / State and Local Government; Intergovernmental Relations / State and Local Government; Intergovernmental Relations: General; H75: Public Economics / State and Local Government; Intergovernmental Relations / State and Local Government: Health; Education; Welfare; Public Pensions; H71: Public Economics / State and Local Government; Intergovernmental Relations / State and Local Taxation, Subsidies, and Revenue
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