Fiscal Centralization: Theory and Evidence from the Great Depression
- American Economic Journal: Economic Policy (Forthcoming)
The Great Depression produced a profound and lasting influence
on the structure of US government. This paper studies theoretically and empirically the increased centralization of revenues
and expenditures by the states relative to local governments during
this period. A model of property and sales taxation and tax delinquency is introduced. In the model, the income decline of the
Depression causes a rise in property tax delinquency and leads to a
shift towards sales taxation and fiscal centralization by the states.
Empirical evidence based on cross-state variation in the severity
of the Depression is consistent with the model's key predictions.
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