Explain the problems of fiscal federalism in Russia and OECD countries.

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Explain the problems of fiscal federalism in Russia and OECD countries.

Problems in fiscal federalist relations and distorted incentives of regional and local administrations are also visible in the implementation of the explicit budget. A trend toward greater subnational budgetary imbalance, debt, and loan guarantees culminated in the overall insolvency of a large number of regions in the aftermath of the August 1998 crisis. Official figures show the consolidated regional budgetary deficit rising gradually to 1.4 per cent of GDP in 1997, before falling to 0.3 per cent in 1998 in the context of greatly tightened borrowing constraints. But this measure of budgetary balance fails to reflect the true extent of the deficit overhang. Primary means of fulfilling (cash) subnational budgets have been expenditure sequestration or the accumulation of budgetary payment arrears. An alternative accruals measure of the consolidated regional deficit that subtracts tax arrears but adds budgetary payment arrears, including those implied by the underfulfilment of the 25 most significant federal mandates discussed above, reaches over 5.5 per cent of GDP in every year for the period of 1996-98 (OECD (2000)). Similarly, while official statistics show subnational domestic debt accumulating to 2.2 per cent of GDP by 1 January 1999, other (rough and incomplete) estimates based on survey data, which include additional categories of debt and loan guarantees, reach as high as 6 per cent of gross regional product (OECD (2000)). Furthermore, 35 per cent of this debt and guarantees was reported as being in arrears as of 1 January1999, reflecting the default and effective insolvency of numerous regional administrations.


3.1 This governor has erroneously equated new eligibility with new access, which is not quite correct for two reasons. First, it is not certain that the 50,000 newly covered children did not have access prior to the change; they may have had privately provided insurance. Empirical studies have shown that Medicaid crowds out some private insurance when eligibility is expanded because Medicaid offers more generous benefits than most private health insurance plans. Second, eligibility does not assure access. If reimbursement rates for providers under Medicare are low, they may refuse to care for the newly eligible children.

3.2 3.4 Suppose the federal government is considering raising the minimum wage to $10 per hour. An economist testifies to Congress that this plan is inefficient and causes deadweight loss.


a) Show graphically the deadweight loss caused by the minimum wage law.





b) Suppose that you are a member of Congress and you believe in the utilitarian social welfare function. How would you determine whether to vote for or against the policy?


The Utilitarian social welfare function demonstrates the correlation between two utility individuals. So if the nominal wage will be raised by a random sum, the utility will obvious raise. Here the graph that shows this.

If i was in Congress, i will vote against because of the deadweight loss. We should find the optimal balance between the labour supply and labour demand. We can see it in division A.


c) Explain why this policy choice demonstrates a trade-off between equity and efficiency.


'Equity-Efficiency Tradeoff'- An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy. This tradeoff is commonly viewed within the context of the production possibility frontier, where any additional gains in production efficiency must be offset by a reduction in the economy's equity.


Within this equity and efficiency tradeoff, equity refers to the economy's financial capital, while efficiency refers to the future efficiency in the production of goods and services. This theory asserts that, in order for a nation to become wealthier, it must save its equity. However, these additional savings will hurt the development of more efficient production in the future.


d) Explain the Earned Income Tax Credit. Explain why the EITC may provide equity with small losses in efficiency.


Earned Income Tax Credit (EITC)A federal income tax policy that subsidizes the wages of low-income earners. The EITC subsidizes the wages of low-income earners to accomplish two goals: redistribution of resources to lower-income groups and increases in the amount of labor supplied by these groups.

The EI TC program has grown from less than $1 billion in 1976 to nearly $45 billion today. Numbers are measured in current dollars.

The EITC exacerbates the marriage penalty by combining both spouses’ incomes to determine eligibility for the credit. Two fairly low incomes can combine to equal a total family income high enough to place the family in the phase-out portion of the EITC. In that situation, adding a second income to the first puts the second income in the range of a very high marginal tax rate. This effect could result in a labor supply reduction for secondary earners in these families. To counter this effect, the EITC could be amended so that the average of the two spouses’ salaries determined the family income, it could provide for a much longer plateau before phase-out for two-earner families, or it could be applied to individual incomes, regardless of marital status, rather than to family income.


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