TAX EQUALIZATION AND ECONOMIC GROWTH: A THRESHOLD ANALYSIS ON BRAZILIAN STATE PARTICIPATION FUND

Abstract

The paper aims to analyze how Brazilian states have responded in terms of
economic growth per capita to transfers coming from federal government program,
through the Participation Fund of the States and the Federal District (FPE). The literature
on tax equalization has emphasized the positive and negative side of the adoption of fiscal
equalization programs on the economic performance of subnational entities, such as
municipalities and states. To measure the impact of the scheme of transfers on the GDP per
capita growth of Brazilian states, one adopts the model of Devarajan, Swarrop and Zou
(1996) together with a threshold effect, as described in Hansen (1999). The cornerstone
of the paper was to capture possible different effects of public spending on the rate of
economic growth per capita depending on the level of budgetary dependence on different
state entities. The econometric results suggest a double output: on the one hand, Brazilian states with higher degree of dependence on transfers from the Union are those that present
a negative correlation between the ratio Investment/Personnel Expenditure (IGP) and the
real GDP growth rate and, on the other hand, Brazilian states with lower dependence on
Union transfers show a positive association between GDP growth and Investment/Spending
Personnel (IGP).