Fiscal Capacity Equalization- Grants with Taxpayers' Lobbying

The economic analysis of tax-base equalization-grants from central to local governments suggests that the transfer mechanism distorts local scal policies by providing incentives to local governments to set excessively high tax rates. In this paper, we extend the analysis by allowing a pressure group to lobby the policy makers to reduce local taxes. In principle, the distortions spurring from the lobbying activity should mitigate those caused by the equalization program. In contrast, we show that taxpayers lobbying may amplify the distortions of the equalization mechanism.