A THEORETICAL VIEW OF REVENUE SHARING GRANTS

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Abstract
A theoretical model of revenue sharing grants including central government and subnational taxes is developed and used to show the grant effects on subnational jurisdiction expenditure and welfare. The individual distributional effects of the grant program and the nature of the incentive for change in expenditure introduced by a tax effort factor in the allocation formula are detailed. The analysis indicates that expenditure effects are not determined solely by interjurisdictional income redistribution and that tax effort allocation will stimulate greater expenditure increases in low income and high effort jurisdictions and cause welfare losses in high income and low effort jurisdictions.

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