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Journal Article

Impact of Grants on Tax Effort of Local Government

Indira Rajaraman and Garima Vasishtha
Economic and Political Weekly
Vol. 35, No. 33 (Aug. 12-18, 2000), pp. 2943-2948
Stable URL: http://www.jstor.org/stable/4409622
Page Count: 6
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Impact of Grants on Tax Effort of Local Government
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Abstract

This paper examines the impact of state-local grants on tax effort of rural local governments (panchayats) for Kerala state using data for 1993-94. After controlling for tax capacity we find a negative impact on own tax revenue of lump sum 'untied' grants that are predictable and unvarying. The reduction in own tax revenue is the result of a selective slackening of tax effort. The post-grant pattern of tax incidence will therefore be less transparent than the nominal pattern, less preserving of voter preferences, and possibly driven by corruption towards greater regressivity. The data contradicts the flypaper effect and also theories of fiscal effects of ethnic fragmentation.

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