Capital Accumulation and Social Welfare in Fiscal Federalism and the Unitary System

This paper presents an analysis on capital accumulation and social welfare in fiscal federalism and the unitary system by using an overlapping generations model. We introduce three possible cases pertaining to how government tax policy towards individuals could be formulated: the government imposes tax on young and old generations under fiscal federalism (case A); the government imposes tax only on young generation under fiscal federalism (case B) as well as under the unitary system (case C). We show that, the level of steady-state capital accumulation as well as social welfare in case A is greater than those in cases B and C if certain conditions are satisfied. Our results suggest that, fiscal federalism is more preferable than the unitary system.