Leviathans, Federal Transfers, and the Cartelization Hypothesis

Federal fiscal arrangements are argued to give rise to tacit collusion among competing Leviathans (Brennan and Buchanan, The Power to Tax, CUP, 1980). Though frequently encountered in academic and policy discussions, the cartelization hypothesis has rarely been scrutinized formally. This paper explores the effect of federal equalizing transfers on Leviathans engaged in tax competition. Contrary to the hypothesis, equalization is found to potentially complement tax competition in taming the Leviathan by implicitly taxing tax revenues extracted by the Leviathan. Thus, transfers might be an appropriate constitutional provision against fiscal expropriation. JEL classification: H7, H1, H20