The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence

Abstract We investigate the effects of fiscal decentralization on income inequality using a sample of 23 OECD countries over the period 1971-2000. We utilize novel and robust measures of fiscal decentralization based on different degrees of fiscal autonomy of sub-central governments. Our results highlight the importance of both the nature of fiscal decentralization-expenditure versus revenue-and the extent to which independent spending responsibility and taxing powers are actually assigned to local governments. A higher degree of tax decentralization is associated with higher household income inequality within a country. Thus, even if fiscal decentralization could be attractive according to efficiency reasons, it may actually have undesirable consequences on the income distribution.