Incentive Effects of Fiscal Equalization: The Case of France

This empirical study shows for 22 French regions between 2002 and 2008 that fiscal equalization does not appear to distort incentives for regional governments. We find a growth-enhancing impact of inter-governmental transfers on regional growth, with no major differences between donor and recipient regions. Only for the extremely poor recipient regions do we find an insignificant transfer effect. In addition, a high 'marginal tax on own tax revenues ' appears to trigger income compensation efforts, yielding higher regional growth. These findings contradict previous empirical studies for federal countries that tend to find adverse incentive effects of fiscal equalization on regional governments and growth. Overall, our tentative explanation for our own contrasting results is that France’s system of transfers is relatively moderate with regard to both the volume and the 'marginal tax on regional tax revenues', and also that local governments in France have – in comparison with other industrial countries – relatively well established own revenues