how decentralization improves efficiency and … decentralization improves efficiency ... •...
TRANSCRIPT
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Prof. Dr. David StadelmannUniversity of Bayreuth, GermanyWalter Eucken Institut, Germany
CREMA – Center for Research in Economics, Management and the Arts, Switzerland
How decentralization improves efficiency and protects future generations
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True federalism works
• True federalism = decentralization and budgetary autonomy• True bottom-up procedure
• Better decisions through expenditure & revenue decentralization + local autonomy
• True federalism strengthens incentives for good politics
• Mechanisms• Exit & voice competition• Laboratory for ideas escape competition• Institutional congruence increase efficiency
Prof. Dr. David Stadelmann
Slide 2
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Institutional Congruence =
Fiscal Equivalence
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Relevance of institutional congruence
Decision maker ≈ Contributor ≈
Beneficiary
Decision maker
ContributorBeneficiary
Institutional Incongruence Institutional Congruence
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Relevance of institutional congruence
Decision maker ≈
ContributorBeneficiary
Too little public expenditure & neglect of needs
Decision maker ≈
Beneficiary Contributor
Too high expenditure & exaggeration of needs
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Heterogeneity and comparisons
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International success of Swiss system Sources: own calculations based on Economist Intelligence Unit, International Monetary Fund, World Economic Forum, OECD, World Value Survey
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What makes Switzerland different?
Prof. Dr. David Stadelmann
Slide 8
• Competition induced through effective decentralization• Tax decentralization: ≈ 25% local jurisdictions, ≈ 40% cantons• Strict no-bailout rule, limited vertical and horizontal transfers• Constitutional setting according to Swiss Constitution
• Art. 3: „Les cantons sont souverains […] et exercent tous les droits qui ne sont pas délégués à la Confédération.”
• Principle of subsidiarity (Art. 5a)• Federalism = decentralization (irrelevance of terms “federalism” and “con-federalism”)
• Voice through direct citizen participation• E.g. fiscal referenda, debt brakes, etc.
Strong institutional congruence
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Enormous heterogeneity inside Switzerland
• Enormous regional diversity in Switzerland regarding• Language• Religion• Topography • Etc.
Need for regional solutions Need for flexibility
Prof. Dr. David Stadelmann
Slide 9
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Heterogeneity regarding industrial structureSources: Swiss Federal Statistical Office
1st sector16651 employees2nd sector1 099 446 employees3rd sector3 778 411 employees
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Banks are not everywhere & only banks are marginally relevant
Sources: Swiss Federal Statistical Office
Share & number of full time equivalent employees
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Heterogeneity regarding policy preferences(Referendum for “Buying Defense Airplanes”)
Sources: Swiss Federal Statistical Office
Share of YES-votes
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Heterogeneity regarding where foreigners live
Share of foreigners
Sources: Swiss Federal Statistical Office
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Taxation and outcomes of Swiss cantons
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True federalism works
• Large heterogeneity decentralization even more relevant• Decentralization theorem (Oates 1972, p. 32): “For a public good -
the consumption of which is defined over geographical subsets […] it will always be more efficient (or at least as efficient) for local governments to provide the Pareto-efficient levels of output […]”.
• BUT? Differences in outcomes?• Yes, of course!
• But: Relatively small outcome differences • But: Output generally better than in (large) centralized states
Prof. Dr. David Stadelmann
Slide 15
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Heterogeneity induces differences in taxationSources: Swiss Federal Statistical Office
Taxation in % of single persons Gross income CHF 80’000, 2015
Taxation in % of married persons, 2 children Gross household income CHF 150’000, 2015
Business tax according to statues
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Small differences in outcomes & impressive outcome levels
Unemployment rate 2015
Sources: Swiss Federal Statistical Office
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Federalism generates interest in public finances
Sources: Neue Zürcher Zeitung (2014), Thalwil mit kleinerm Defizit, 01.04.14, Nr. 76, S. 18.
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Limited fiscal equalization
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National fiscal equalization in Switzerland
Prof. Dr. David Stadelmann
Slide 20
• Reform of fiscal equalization in 2004• Introduced through referendum• 64% yes votes
• Aim: Limited equalization of fiscal capabilities (≈ 5bn Swiss Francs) & extension of fiscal autonomy
• Mechanisms:• Resource based equalization• Burden based equalization• Hardship compensation (decreases 5% every year)
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National fiscal equalization in SwitzerlandSources: Beobachter, Bürger & Verwaltung, https://www.beobachter.ch/burger-verwaltung/nationaler-finanzausgleich-ein-check-und-keine-fragen.
Orange: Contributing cantonsBlue: Receiving cantons
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Federalism as a laboratory & protector of future generations
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Interaction of federalism with cantonal self-imposed expenditure & revenue rules
Sources: Yerly, N. and Stadelmann, D. (2017), "Finanzautonomie und Fiskalregeln: Erfahrungen aus der Schweiz", Wirtschaftspolitische Blätter, forthcoming.
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The non-bailout of bankrupt LeukerbadSources: http://www.geo.de/reisen/community/bild/152742/Leukerbad-Schweiz-Blick-vom-Gremmipass-auf-Leukerbad
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The riddle of low Swiss municipal debts
• Common wisdom: Debts = burden for future generations• Ricardian equivalence: Debts = no burden for future
generation if ...
• Common belief: Ricardian conditions not met in reality• Particularly not at local/regional level
• Common wisdom: Debts = burden for future generations
Prof. Dr. David Stadelmann
Slide 25
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(cont’d…) The riddle of low Swiss municipal debts
• Moralist view: Debts = bad
• Homo oeconomicus: Debts = cool• Politicians: Debts = coolest thing in world
• (Just pretend that debts are a bad)
• The riddle: Why do most Swiss local jurisdictions and Cantons have comparatively low public debts?
• Solution: “We owe it to ourselves” • … due to debt capitalization
Prof. Dr. David Stadelmann
Slide 26
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Solution to the riddle
Prof. Dr. David Stadelmann
Slide 27
Local jurisdictionLeuk
Local jurisdictionLeukerbad
Lower public net debts
Higher public net debts
Debt capitalization: Property prices in Leuk higher than in Leukerbad
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Local public debts affect property pricesSources: David Stadelmann & Reiner Eichenberger, 2014. "Public debts capitalize into property prices: empirical evidence for a new perspective on debt incidence," International Tax and Public Finance, Springer, vol.
21(3), pages 498-529.
600 800 1000 1200
Property prices in comm
Property Prices
600 800 1000 1200
Communities with low public net debtsCommunities with high public net debts
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Local public debts affect property pricesSources: David Stadelmann & Reiner Eichenberger, 2014. "Public debts capitalize into property prices: empirical evidence for a new perspective on debt incidence," International Tax and Public Finance, Springer, vol.
21(3), pages 498-529.
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• Capitalization of net debts• 60-100% debt capitalization
• Public debts no struggle between generations • Public debts struggle between today’s property owners and tenants
• Federalism with real autonomy of local jurisdictions protects future generations from public debts
Prof. Dr. David Stadelmann
Slide 30
Local public debts affect property prices
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Insights generalize
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Insights from Switzerland generalize(e.g. in Denmark)
Sources: Nielsen (2015), Fraud and Capitalization of Municipal Debt, mimeo, Copenhagen Business School, Denmark.
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Insights from Switzerland generalize(e.g. in Scandinavia in general)
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Insights from Switzerland generalize(e.g. in Ancient Greece)
Sources: Eichenberger & Stadelmann, "Athen als Modell", Frankfurter Allgemeine Sonntagszeitung, Nr. 45, 13. November 2011.
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Conclusions
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Prof. Dr. David Stadelmann
Slide 36
Conclusions
• Federalism with true regional and local autonomy works• Fosters institutional congruence• Leads to competition• Induces comparisons
• In federalist systems jurisdictions generate new ideas• Innovation and flexibility central in globalizing world
• Federalism = protector for future generations
• Insights generalize
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Thank you!
Prof. Dr. David Stadelmann
Slide 37
Find my research papers on: • http://bit.ly/StadelM
• … or search on Google: “David Stadelmann” Bayreuth
@davidstadelmann
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Appendix
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Innovation, decentralization & grantsSources: Eidgenössische Finanzenverwaltung (EFV) (2016), Finanzstatistik der Schweiz 2014, Jahresbericht, Bundesamt für Statistik, Neuchâtel.
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Commuting in Switzerland as a form of exitSources: Eidgenössische Finanzenverwaltung (EFV) (2016), Finanzstatistik der Schweiz 2014, Jahresbericht, Bundesamt für Statistik, Neuchâtel.
Net commuting balance
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Finances of cantons and local jurisdictionsSources: Eidgenössische Finanzenverwaltung (EFV) (2016), Finanzstatistik der Schweiz 2014, Jahresbericht, Bundesamt für Statistik, Neuchâtel.
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Consequences of debt capitalizationSources: Stadelmann, D. & Eichenberger, R. (2012), 'Consequences of Debt Capitalization: Property Ownership and Debt versus Tax Choice.', Southern Economic Journal 78(3), 976-998.
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• Increase of efficiency through „Voting by Feet“ (Tiebout 1965, Banzhaf & Walsh 2008)
• Higher quality of education with financial autonomy of jurisdictions (Barankay & Lockwood 2007, Adam et al. 2014)
• Decentralization protects from exploitation by leviathan (Brülhart & Jametti 2007, Eichenberger & Schelker 2007)
• Smaller shadow economy and higher tax morale in decentral systems (Buehn et al. 2013, Torgler et al. 2010)
• More stable public finances (Baskaran 2010)• Higher life satisfaction (Frey & Stutzer 2000)
Prof. Dr. David Stadelmann
Slide 43
Further strengths of federalism