Vertical externalities with lump-sum taxes: how much difference does unemployment make?

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1 Eropan Jornal o ovrnmn and Economics Volm 3, mr (Jn 204) I: Vrical xrnaliis wih lmp-sm axs: how mch dirnc dos nmploymn mak? Digo Marinz, Univrsidad Palo d Olavid, pain omas jögrn, Umå Univrsiy, wdn Asrac his papr analyss how h xisnc o nmploymn acs h convnional approach o vrical xrnaliis. W discss h opimaliy rl or h provision o plic inps oh in a niary and in a dral sa. Or indings indica ha dcnralising spnding rsponsailiy on plic inps in h prsnc o nmploymn allows op o closr o h irs s lvl. Morovr, w dscri h inailiy o h dral govrnmn, having as a acklrg ladr, o rplica h niary ocom, nlss hr ar nw policy insrmns a govrnmn's disposal. JEL classiicaion J2; H4; H7. Kywords Plic inps; nmploymn; vrical xrnaliis. Acknowldgmns W ar gral o h paricipans a h 20h panish Ming on Plic Economics, hr anonymos rrs and h dior or hir commns. h ahors wold lik also o hank h panish Minisry o cinc (Projcs ECO and ECO ), Jna d Andalcia (Projcs EJ and EJ-6882), h Bank o wdn rcnnary ondaion (ilsn Riksankns Jilmsond), h wdish Concil or Working Li and ocial Rsarch (A) and h aional ax Board (kavrk) or rsarch grans. 75

2 Eropan Jornal o ovrnmn and Economics 3() Inrodcion h sandard approach o vrical xrnaliis salishs ha sharing axs wn dirn lvls o govrnmn has an impac on icincy. rom h sminal conriion y Kn (998), a nmr a paprs has dal wih his iss, oring varios solions which may inrnalis his prolm (s, or insanc, Boadway and rmlay, 2006). A common iss in all hs conriions is assming disorionary axaion. Anohr common ar in his lirar is h assmpion o a compiiv laor mark, wih h laor orc maching xacly h dmand or laor. Paprs sch as Dahly and Wilson (2003) and Kosogiannis and Marinz (2008) giv a cnral rol o h spply and dmand or laor in drmining qiliria always wih laor mark claring. In sch a world, hr is no scop or on o h convnional iscal policis aimd a ighing nmploymn, namly h provision o plic inps. In ac, o h s o or knowldg, no papr so ar has dal wih vrical xpndir xrnaliis (casd y h provision o prodciviy-nhancing plic xpndirs in a dral conx) in h prsnc o nmploymn. his has no n h cas whn horizonal xrnaliis ar involvd (Ogawa al, 2006). his papr prcisly comins vrical xrnaliis and laor mark imprcions in a singl modl. Indd, w ild a horical ramwork in which h dral govrnmn is in charg o nmploymn nis and h sas provid a plic inp wih posiiv cs on dmand or laor. ch a horical ramwork inds som ral paralllls in h inrnaional vidnc so long as in conris lik pain, h U or Asralia (js o nam a w) h allocaion o spnding rsponsiiliis and axs across irs o govrnmn is o h kind w ar considring hr. axs ar assmd o lmp-sm cas w ar inrsd in ocsing on h icincy implicaions drivd rom h xpndir sid o govrnmn dcisions rahr han on vrical ax xrnaliis. Anyway, w will show ha ignoring disorionary axaion as a policy varial may play a crcial rol or corrcing h vrical xrnaliy. h rsls in h papr may smmarisd as ollows. irs, w show ha, in spi o sing xclsivly lmp-sm axs o inanc govrnmns, a vrical xpndir xrnaliy ariss whn nmploymn xiss. his conirms a prvios rsl ond in h lirar (Dahly and Wilson, 2003; Marinz, 2008), namly, ha oh vrical (ax and xpndir) xrnaliis ar indpndn o ach ohr. h provision o plic inps cras a posiiv vrical impac on dral rvns as long as his yp o plic spnding incrass h dmand or laor and, hror, i rdcs h rsorcs ndd a dral lvl or paying nmploymn nis. And his occrs wiho h co-occpancy o lasic ax ass. Morovr, w also s how h rl or h provision o plic inps a sa lvl is closr o h prodcion icincy condiion han ha corrsponding o a niary conry wih a non-claring laor mark. Oviosly, his dos no imply ha dcnralisaion is closr o opimaliy han cnralisaion h ac ha h assignmn o disoring insrmns (i.., h plic inp) across dirn lvls o govrnmn rally mars or assssing opimaliy. cond, w hav analysd whhr h dral govrnmn is al o rplica h ocom o a niary conry. As is sandard in mch o h arlir lirar, w hav assmd ha h ppr lvl govrnmn knows h sas' racion ncions and hror havs as a acklrg ladr vis-a-vis h sa govrnmns. Or rsls dvia rom h arlir sdis so long as h dral govrnmn has no sicin policy insrmns a is disposal o implmn h niary qilirim. his is a consqnc o sing lmp-sm insrmns. 76

3 Marinz and jögrn Vrical xrnaliis wih lmp-sm axs In a sns, hs rsls ar rlad o h discssion iniiad y ao (2000), who has shown ha h ailiy o h dral govrnmn o rplica scond-s rsls dpnds on wha yp o policy insrmn is availal o h dral govrnmn. Prcisly, as rsl o aking ino considraion a nw (non-lmp-sm) policy insrmn, i.., a plic inp providd y h dral govrnmn ha is complmn o ha ord y h sas, h ppr lvl o govrnmn is al o rplica h scond-s ocom o a niary conry. h srcr o h papr is as ollows. cion 2 dscris h main ars o h modl and h dirn vrsions o h opimaliy rl or h provision o plic inps. cions 3 and 4 vala h ailiy o h dral govrnmn o rplica h niary ocom. inally, scion 5 conclds. h Basic Modl his scion aims o show wo rsls. irs, w characris h qilirim in a cnralisd conry wih nmploymn. his allows s o s how h opimal rl or h provision o plic inps is modiid in h prsnc o nmploymn. I will also srv as a nchmark scnario wih which w can compar h dral qiliria o analysd low. cond, h nchmark modl prsnd in his scion also highlighs ha h iscal dcisions akn y on lvl o govrnmn (pariclarly ha wih spnding rsponsiiliis on plic inps) will ac h ohr lvls o h plic scor. As a consqnc, vrical xpndir xrnaliis will aris vn hogh only lmp-sm axs ar sd o rais rvn in h plic scor. h horical ramwork consiss o irms, hosholds and wo dirn irs o govrnmn: h dral lvl and k snaional sas. irms ar idnical across h conry and, or h sak o simpliciy, w assm ha hir nmr is normalisd o on in ach sa. All o hm prodc a singl good on h asis o h ollowing prodcion ncion:, K, K, () whr is laor, K a ixd acor and a plic inp. ch a prodcion chnology allows s o qaliy h plic inp as acor-agmning. 2 In his conx, h plic spnding will incras h rrn o h ixd prodcion acor K, which w normalisd o on, in which cas h proi can xprssd as:, w, (2) whr w is h wag ra. 3 h irs-ordr condiion or proi maximisaion rads w (, ), and i implicly dins h dmand or laor as: w, w (3) W do no dno h sas y s-indxs or making asir h noaion and givn ha hy ar assmd o idnical. 2 An alrnaiv approach wold imply a prodcion ncion wih consan rrns o scal in all h inps (priva and plic). his wold h cas o irm-agmning plic inp. I wold cra conomic rns ha, in rms o h modl w dvlop hr, wold no xhii ssanial dirncs wih rspc o wha w oain low. 3 h rrn o laor is no acd y h plic inp, alhogh his wold h normal siaion wih acor-agmning plic inps. his is no h cas hr cas w ar inrsd in considring h impac o h plic inp on mploymn, and h dmand or laor w oain low implis ha h wag ra is indpndn o w ( M, g). In a modl wih ll-mploymn, howvr, w shold s p w ( M, g). 77

4 Eropan Jornal o ovrnmn and Economics 3() By comining qaions (2) and (3), w oain h proi ncion: w, (4) W assm ha all hosholds hav h sam prrncs or consmpion c across h draion and hs prrncs ar dscrid y a iliy ncion (c), which is incrasing in c. Each sa is poplad y hr yps o consmrs: a irm-ownr as wll as mployd and nmployd workrs, rspcivly. hs consmr yps ar dnod y h sprindics "", "" and "". h irm-ownr is ndowd wih a ixd acor o prodcion K, which h irmownr hirs o h irm in rrn or h irm s proi. His dg-consrain is dind y c, whr is a lmp-sm ax. Rgarding h ohr wo yps o consmrs, w mak a disincion wn h oal laor orc availal or working, M, and h nmr o hosholds ha civly ar mployd. Oviosly, ll mploymn is characrisd y M. h dg consrain or an mployd workr is c w, whr is a lmp-sm ax, whil h dg consrain acing an nmployd workr is givn y c, whr dnos a n o ax nmploymn ni. In a cnralisd conry, or h policy varials,,,, h govrnmn maximiss a iliarian wlar ncion W M k k k (5) sjc o h ollowing dg consrain: M 0 k k k k (6) In a siaion whr hr is no nmploymn, h irs-ordr condiions ar as ollows: OC : (7) OC : (8) : OC (9) OC : 0, (0) whr is h Lagrang mliplir associad wih h govrnmn s dg consrain. h irs wo qaions show h sandard rsl rom opimisaion wih lmp-sm axs and ransrs: h priva marginal iliy (o ach yp o consmr) ms qal o h social wlar cos o axaion, which hr is caprd y h Lagrang mliplir. Eqaion (9), in rn, is h sandard prodcion icincy condiion in h provision o plic inps. inally, (0) is h dg consrain o cnral govrnmn, whr h las rm o LH in (6) can droppd as hr is ll mploymn and M. L s now rn o h qilirim wih nmploymn. I is assmd ha h o xisnc o a minimm wag, w, which xcds h mark-claring wag, w, cras nmploymn so ha M. his modiicaion will hav an impac on h opimal provision o. In addiion, h irs-ordr condiion or h nmploymn ni ms also akn ino considraion. h irs-ordr condiions or and ar 78

5 Marinz and jögrn Vrical xrnaliis wih lmp-sm axs OC : () OC :. (2) L s now modiy h modl o incld dirn irs o govrnmns. W assm ha h dral lvl is in charg o providing h nmploymn ni whil h sas provid h plic inps. 4 Boh lvls o govrnmn shar h ax on mployd workrs (wih h ax ras and chosn y h dral and sa govrnmns, rspcivly; ). h rvns collcd rom h ax on prois ar assignd in a proporion (which is xognosly drmind) o h sas ( 0 ), whil h ax ra is xclsivly dcidd y h dral govrnmn. In sch a ramwork, l s assm ha h sas hav as ash playrs, ha is, ach snaional govrnmn ignors h impac o is iscal dcisions on dral rvns. hror, h opimisaion prolm o solvd y h sas is: Max W s.. w M ( ) 0 o w, o w w, whr is a vrical lmp-sm rom h dral govrnmn o sas. h las inqaliy rrs o h disorion xising in h laor mark, which is h rason or nmploymn. h irs-ordr condiions or, and giv: OC OC (3) : (4) 0 : (5) OC : 0 (6) Osrv ha w, or lar s, din h irs-ordr condiion or o a ncion whras w also s h shor noaion or h sa govrnmn s dg consrain. Eqaion (4) ss p h sam rl or choosing h opimal ax ra on mployd workrs in a cnralisd conry as in a world wih wo irs o govrnmn. his is a dirc consqnc o sing lmp-sm axs. Evn in h prsnc o ax sharing wn dirn lvls o govrnmn, i hoshold havior is no acd y axs, hr is no scop or vrical ax xrnaliis. By conras, and laving asid h discssion on h opimal lvls o (s Marinz and anchz (200) or a graphical analysis and Marinz and jongrn (203) wih a similar modl o his on), l s gin y comparing h provision o h plic inp in a wo-ir plic scor (qaion (5)) wih h provision in a 4 his disriion o spnding rsponsailiis is no crcial or h rsls, which wold symmric wih an invrs vrical assignmn o plic xpndirs. Anyway, h schm w ollow hr is in lin wih h mainsram o hory o iscal dralism. 79

6 Eropan Jornal o ovrnmn and Economics 3() dirs rom is qivaln in (2), niary plic scor (2). h rm namly, ( ). As long as h dral govrnmn implmns a nonngaiv lmp-sm ax on mployd workrs, i ollows ha sinc h sas dcid ovr, his nds o rdc h ovr-provision ias ha h prsnc o nmploymn cras in h provision o plic inps. In ohr words, xprssion (5) is closr o (9) han qaion (2). 5 In his rgard, and conrary o h convnional viw in h lirar on vrical xrnaliis, w propos hr ha mor dralism may lad o mor prodcion icincy. o s his in an xrm cas, assm ha all rn axs accr o h sas ( ); h dral govrnmn nds o inancd y a ngaiv iscal gran (rom sas) and/or y charging a posiiv ax ra on workrs. his lar solion involvs an opimal rl or h provision o plic inps closr o h prodcion icincy condiion, minimising h dirnial c ha h prsnc o nmploymn cras in h discssion on opimaliy. Consqnly, h havior o dral govrnmn coms a crcial iss o drmin h c o nmploymn on h achivmn o h prodcion icincy condiion in h provision o plic inps. his is wha w sdy in h nx scion. h ailiy o h dral govrnmn o rplica h cnralisd ocom A common way o corrcing vrical (ax and xpndir) xrnaliis is o assm ha h dral govrnmn acs as a acklrg ladr vis-a-vis h lowr lvl govrnmns. In sch a conx, h sqnc o h gam is as ollows. irs, h dral govrnmn dcids on,, and, rsidally, on, whil aking ino considraion h sas' racions o changs in dral policy varials. cond, h sa govrnmns drmin and, raing as xognos all h dcision varials o h ppr-lvl o govrnmn. Dspi h ac ha h dral govrnmn is h irs-movr, w ar no hr sric sns in h prsnc o a pr acklrg ladr sinc i lacks nogh policy insrmns ha ar sragically complmnary (or ssi) o h insrmns o h ollowr(s). Undr h nw condiions, h opimisaion prolm acing h dral govrnmn can now sad as ollows: Max W w km k k ) s.. k k( ) k( M ) k 0 ( (7) (,,,, M, ) (8) (,,,, M, ) (9) w, o w w. 5 I is sraighorward o show ha wih ll mploymn no vrical (ax and xpndir) xrnaliis appar. 80

7 Marinz and jögrn Vrical xrnaliis wih lmp-sm axs Exprssions (8) and (9) ar h sas' racion ncions. 6 As wrin aov, givn ha w hav s p lmp-sm axs on laor incom, hr is no scop or vrical ax xrnaliis. In ohr words, h changs in h dral ax ras do no ac h marginal cos o h plic nds prcivd y h sa govrnmns and, consqnly, h sa ax ras. hror, or solving h dral prolm, som inormaion on comparaiv saics o hs racion ncions is rqird. o do ha, w sar rom h irs-ordr condiions o sas (5) and (6). 7 Dirniaing h ncions and (and ignoring sprindx "" or sak o simpliciy in h noaion) prodcs: d d d d d 0 d d d d d 0 his wo-qaion sysm can xprssd sing a maricial orm as ollows (and ar solving or d and d ): d d rom (22), w can rriv: d d d d d d d d d d d d d d d (20) (2) (22) A ) (23) ( A ) (24) ( A ) (25) ( A ) (26) ( g g A ) (27) ( g g A ) (28) ( g g whr A is. Rrning o h dral govrnmn s prolm, i is clar ha is dg consrain can wrin as M. Plgging his ino h ojciv ncion (7), w oain h irs-ordr condiions or h policy varials o h dral govrnmn: 6 Boh qaions ar no ndamnally rdcd orms sinc ( w, ) ; h nx chnical dvlopmns ar, howvr, lly consisn wih h compl diniion o h ncions involvd. 7 h irs-ordr condiion (4) can ignord in his analysis. In a sns, his xprssion dos no admi any inlnc rom dral varials and, consqnly, i dos no mar a his poin. Anyway, xprssion (4) can asily insrd in (5) wiho modiying ssanially h analysis low. 8

8 Eropan Jornal o ovrnmn and Economics 3() OC( ) : ( ( ) ( ) ( OC( ) : ( ) ( OC( ) : ( ( ) ( ) ( ) ( M )( w ) ( ) ( ) ( M )( w ) ( M )( ) ( ) ( w ) ( ) ( ) 0 0 ) 0 ) ) ) (29a) (29) (29c) OC( ) : k k( ) k( M ) k 0 (29d) aking ino accon ha can rsidally oaind rom h aov or qaion-sysm, w simpliy (29a)-(29d), which givs s h ollowing rsls: 0 (30) (3), (32) whr w (, ), (23)-(25) and h corrsponding parial drivaivs o and (according o (5) and (6)) hav n sd. Wha is implicily salishd in (30)-(32) is h inailiy o dral govrnmn o ac sas' havior. On conclsion is ha h dral ax ra on mployd workrs,, has no c on h corrsponding sa ax ra, (qaion (30)), also non o h policy varials o h ppr lvl o govrnmn has any impac on h sa provision o plic inps. Indd, rom xprssions (23)-(25), i is clar ha 0, ha is, hr is no way hrogh which h dral govrnmn can modiy h provision o plic inps. h niq impac o h dral policy varials ( and on ) is rivial: an incras (dcras) in som o hm rdcs (incrass) h sa ax ra in a magnid givn y h nmr o mployd workrs. hror, h highs lvl o govrnmn is no al o rplica no only h irs-s ocom o (9) also h opimaliy rl or h provision o plic inps in a niary conry wih nmploymn. 8 w insrmns or h dral govrnmn: complmnary plic inps hings may dirn i h dral govrnmn is also in charg o providing a plic inp,, which is assmd o complmnary wih h sa plic inp (now dnod ). his modiicaion mans ha h modl coms mor ralisic in h sns ha dirn lvls o govrnmn ar now joinly involvd in inancing complmnary plic inrasrcr projcs. his modiicaion o h modl implis ha h prodcion, proi and laor dmand ncions ar modiid as ollows: 8 Anyway, w ms awar ha h irs-s vals or long as hy ar lmp-sm axs. and ar garand in ach scnario as 82

9 Marinz and jögrn Vrical xrnaliis wih lmp-sm axs K,, K,, w,, (33) (34) w,, w. (35) As or, comining (34) and (35), h proi ncion can wrin as ollows: w,,. W k k M k, In a niary conry, h govrnmn maximiss sjc o k k k k km 0. In a siaion characrisd y ll mploymn ( M ), h opimal provision o plic inps is givn y h sandard prodcion icincy condiion:. By conras, whn nmploymn appars as a rsl o non mark-claring wag ra, h irs-ordr condiions w.r.. and ar, rspcivly: OC : OC : (37) I is sraighorward o show ha whn h govrnmn is concrnd wih h lvl o mploymn, i h c o, say, h sa plic inp on laor dmand is highr han h qivaln c y h dral plic inp ( ), hn h opimal amon o will xcd. In a dcnralisd nvironmn, in which oh h dral and h sa govrnmns hav as ash compiors, h irs-ordr condiions or and ar, rspcivly: OC : OC : (39) Comparing hs xprssions wih (36) and (37), i is clar ha oh yps o plic inps will ndrprovidd i govrnmns s posiiv ax ras on mployd workrs. Undr hs circmsancs, h lvls o and will low h opimal ons drivd rom a cnralisd sing. In ohr words, ach lvl o govrnmn dcids a lvl o plic inp wiho considring is impac on ohr jrisdicions. Consqnly, hr now xiss a dol vrical xpndir xrnaliy rom ach lvl o govrnmn o h ohr. h qsion now is whhr h dral govrnmn, having as acklrg ladr, is al o rplica h scond-s ocom. Rcall ha h answr o his qsion was "no" in a sing in which h dral insrmns wr,, and. Wih h dral govrnmn also providing a plic inp, is opimisaion prolm is now: (36) (38) 83

10 Eropan Jornal o ovrnmn and Economics 3() Max s.. W k k w km ( ) k k( ) k( M ) k k 0 (40) (,,,, M,, ) (4) (,,,, M,, ) (42) w,, o w w. o ha h sas' racion ncions (4) and (42) now incld a nw argmn: h dral plic inp. As or, w irs nd o know som comparaiv saics o hs ncions. Eqaions (23)-(28) ar sill valid in h nw conx -wih a sligh chang: h rm A ms ssid y A -(s low)- and w only hav o add h corrsponding rspons o and o h nw dral policy insrmn. Pariclarly, w can wri: d d d d A ) (43) ( A ), (44) ( whr A is. In his rgard, a signiican dirnc appars whn comparing hs nw rsls wih h prvios ons. Whil in cion 3 h dral govrnmn only had a vry limid (and rivial) impac on sa ax ra (rcall xprssions (30)-(32) and h ac ha 0 ), hings ar now qi dirn. Considr irs h d cas o ; ar som algra maniplaions i can sn ha h c o d changs in h dral plic inp on h sa provision o plic inps is givn y: d d / / 0. his mans ha an incras in h dral plic inp ncorags h provision o h sa plic inp. ha is, hr is an addiional channl hrogh which h dral govrnmn can ac sas' havior. In h cas o h sa ax ra, somhing similar happns: d d d d 0. B hr h c o dral plic inp on sa policy varial is no so clar. Indd, an incras in h dral plic inp may lad o ihr an incras or a dcras in h sa ax ra on mployd workrs. Anyway, i is worh noing ha again dral govrnmn may ac sas' havior, which was no possil ndr h prvios assmpions. ivn his, h irs-ordr condiion or h opimal provision o is as ollows: 84

11 Marinz and jögrn Vrical xrnaliis wih lmp-sm axs OC : d d ( d d d d ). d d Ar som algra maniplaions, i can shown ha o rplica h sconds condiion (36) rqirs o hold: d d. I h individal iliy is assmd o linar ( ( c) c ), i is sraighorward o prov ha oh sids o xprssion (46) hav h sam sign. Hnc, o rplica h scond s ocom or h provision o plic inps is a ral possiiliy whn dral govrnmn can spnd mony in plic inps which ar complmnary o sa plic inps. Conclding rmarks Vrical xrnaliis sally involv challngs or icincy in dral conris. haring axs wn dirn lvls o govrnmn or h provision o crain plic xpndirs wih cs on ohr irs o govrnmn rvns imply dviaions rom h opimaliy rls, which wold oaind in a cnralisd world. Howvr, h prsnc o vrical (ax and xpndir) xrnaliis can disrgardd i lmp-sm axs ar sd. Indd, h ida o govrnmns acing iscal dcisions akn y ohrs rqirs disoring axs al o modiy hosholds' havior. All hs gnral samns hav o qaliid in h prsnc o nmploymn, and his has n wha w hav don in his papr. Pariclarly, w hav il a simpl modl wih lmp-sm axs and nmploymn in which h opimal rl or h provision o plic inps dpnds on whhr h srcr o h conry is dral or no. Indd, whil hr is no scop or vrical ax xrnaliis (h ac o sing lmp-sm axs hr is crcial), a dviaion rom h scond-s ocom aks plac whn sas ar in charg o h provision o prodciviy-nhancing plic acors and h dral govrnmn inancs nmploymn nis. W hav conirmd ha h opimaliy condiion or h provision o plic inps ms considr h impac o his yp o plic xpndir on mploymn and, consqnly, on plic spnding in nmploymn nis. As h prodcion icincy condiion or plic inps is no saisid vn in h cas o a cnralisd conry, w hav analysd wha wold occr whn sas having as ash playrs ak par in h gam. inc s-naional govrnmns do no ak ino accon h c o hir plic xpndirs on nmploymn nis, h ovr-provision o plic inps (compard o h irs-s cas wih ll mploymn) is lowr wih a dral srcr han in a niary conry. Whn w hav wondrd ao h capailiy o dral govrnmn o rplica h ocom o a niary conry, w hav assmd ha h ppr lvl o govrnmn havs as a acklrg ladr, considring h sas racion ncions. Undr sch a scnario, w hav concldd ha, nlik prvios paprs, dral govrnmn is no al o inrnalis h vrical xpndir xrnaliy. dral policy varials hav no impac on sas' dcision varials. In par, his is casd y sing lmp-sm axs; indd, disorionary axaion can ac agns' havior and his is h way hrogh which all h cs o plic inps can inrnalisd. By conras, whn h dral govrnmn is also in (45) (46) 85

12 Eropan Jornal o ovrnmn and Economics 3() charg o providing a plic inp which is complmnary o h sa plic inp, i is possil o rplica h scond-s ocom or h opimal provision o sch as plic inps. A nmr o isss aris or rhr rsarch. Asymmris a rgional lvl in h draion can akn ino considraion. ivn or dral dg consrain, h characrisaion o qiliria may hn involv ha no all h rsorcs collcd y h ppr lvl o govrnmn in a rgion ms spn in sch rriory; consqnly, som possiiliis or horizonal rdisriion aris and vn or xplici qalisaion schms. Also ndr his ramwork, in h prsnc o moil prodcion acors, phnomna o ax compiion may ak plac, wih h consqn cs on icincy and rgional laor marks. A hird avn or rhr rsarch cold asd on an alrnaiv way or inclding nmploymn in h modl. L hink s, or insanc, o a sysm o gnros nogh nmploymn nis and in which h workrs ak laor dcisions. As a policy implicaion w wold ndrlin how imporan h coordinaion o dirn lvls o govrnmn is o aain social wlar gains. Indd, h dsign o dral and sa iscal policis ms ak ino accon h magnid o hir cross cs on h ax rvns o ohr irs o govrnmn. Pariclarly, his is r in h cas o plic inrasrcr cas his yp o govrnmn xpndir is vry vlnral o plic spnding cs and is nis ar vry visil. Incrasing h coordinaion in h provision o plic ranspor inrasrcr (som roads may providd a h rgional lvl, whras railways may providd y h dral govrnmn) ranslas ino mor social wlar, par o which will in rms o mploymn. his wold spcially appropria in conris lik pain, whr h nmploymn ras hav rachd xraordinarily high vals in h armah o h ra Rcssion. his is spcially prinn in h conx o iscal asriy o many dvlopd conris in h armah o his rcssion. rowh-nhancing policis sch as hos rlad o plic inrasrcr projcs ar al o gnra posiiv iscal xrnaliis in h orm o rdcd plic spnding in nmploymn nis and incrasd ax rvns rom laor axaion. his is a valal ni ha shold no ndrsimad whn dsigning conomic policis. Rrncs Boadway, Roin and Jan-rançois rmlay (2006) A hory o iscal imalanc, inanzarchiv/plic inanc Analysis 62 (): -27. Dahly, Bv and Lonard. Wilson (2003) Vrical iscal xrnaliis in a draion, Jornal o Plic Economics 87(5/6): Kn, Michal (998) Vrical ax xrnaliis in h hory o iscal dralism, IM a Paprs 45 (3): Kosogiannis, Chrisos and Digo Marinz (2008) Ad valorm axs and h iscal gap in draions, Economics Lrs 99 (3): Marinz, Digo (2008) Opimal dral axs wih plic inps, inanzarchiv /Plic inanc Analysis 64(4): Marinz, Digo and A. Jsús anchz (200) A no on h opimal lvl o plic inps, ocial Choic and Wlar 34(3): Marinz, Digo and omas jongrn (203) Can laor mark imprcions cas ovrprovision o plic inps?, Jornal o Economic Rsarch, 8 (2): Ogawa, Hikar, Yashiro ao and oshiki amai (2006) A no on nmploymn and capial ax compiion, Jornal o Uran Economics 60(2):

13 Marinz and jögrn Vrical xrnaliis wih lmp-sm axs ao, Moohiro (2000) iscal xrnaliis and icin ransrs in a draion, Inrnaional ax and Plic inanc, 7: