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1 "Funds distributed through mutual settlements" is an additional channel of financing federal financial aid to the regions which proved to be totally non-formalized, the inter-regional distribution of those not being envisaged by the annual budget law.

2 Regional debt value is defined by both the capacity of the regional authorities to gain financial aid (federal loans are also regarded as a kind of financial aid for in most cases they prove to be partially or totally free and unrepayable) and loan value restrictions imposed by budget legislation. Accumulation of outstanding credit liabilities practiced by regional authorities proves to be another specific form of regional deficit financing. But the problems connected with subfederal loans make up a subject of another investigation and are not considered in this work.

3 See I. Trunin "Record of Interbudgetary Relations in Russia", Moscow: IET, 2000, http://www.online.ru/sp/cepra

4 Corresponding activity of regional authorities can be characterized by the number of deputies elected in the region and constituting governmental fraction as well by the percentage of votes received by the President in the region during the elections, etc.

5 see Rubenfeld (1987)

6 see Juravskaya (1998)

7 for the median voter theorem see Black (1948)

8 See Atkinson and Stiglitz (1980). The problems raised by shaping the regional authorities’ behavior model on the basis of either median voter or representative consumer are also discussed in Holtz-Eakin and Rose (1988)

9 Taxpayers homogeneity is usually postulated in the models describing equilibrium public goods provision in local jurisdictions. For instance, decentralization theorem presupposes homogeneity (see Oates (1972)). Basic model for theory of clubs by Buchanan later adapted for the description of equilibrium public goods provision and local community size also assumes homogeneity (see Buchanan (1965), Musgrave and Musgrave (1989)). Homogeneity is also postulated in the simplest model describing Tiebout hypothesis and the latter may serve as a basis for such kind of homogeneity, when regional authorities decisions on the production of local public goods proves to be independent and population mobility proves to be high. (see: Tiebout (1956)). Alongside with that both Tiebout hypothesis and clubs model could explain the reasons for homogeneity if the given assumptions prove to be true.

10 Generally speaking, bureaucrats’ interests are largely determined by influence degree they could exert, by resource amount they could control as well as by public control. According to Niskanen model (see Niskanen (1971), Chernick (1979)) officials tend to aspire for public expenditure level exceeding optimal level.

11 Utility function will change without any loss inflicted on its features manifesting typical preferences. Therefore it is possible that in the function E be substituted for by public goods provision level Q=E+const, where the constant may be either positive or negative but in any case exogenously given.

12 It can be assumed that taxes on enterprises are varied then labor demand will depend upon the taxes and, thus, enterprise tax value will be included into the utility function of the electorate all the same. But at this stage we are not interested in the analysis tax burden distribution between labor and capital, therefore, it will be easier to neglect taxes on enterprises.

13 As it was mentioned above, regional authorities’ utility depends upon regional tax burden value, i.e. tax incidence imposed upon regional product, rather than total budget revenues amount (the latter influences utility function through budget expenditure amount)

14 See, e.g. Samuelson (1954)

15 See Williams (1966)

16 It should be noted that utility function definition like U(E,T)=lnE+a∙ln(T) leads to technical difficulties, if T value is minimal.

17 A more general financial aid formula based upon actual income, expenditure, and standards and possessing a larger number of independent coefficients could be analyzed as well. But regarding the given financial aid model, formula (23) will serve as the basis for further calculations.

18 The formula of transfer calculations being shaped year after year (from 1994 to 2001), there was a gradual transition from actual income and expenditure values to standard ('normative') expenditure needs and tax capacity values. The transition was aimed at creating both incentives to increase tax efforts of the regional authorities and incentives to reduce budget expenditures and improve the efficiency of the latter.

19 It should be also noted that in general case the part of the gap between revenues and expenditures covered by federal financial aid as well as the weight determinant for all the actual values may be different for different regions.

20 See, e.g., Wilde (1968)

21 The correlation between revenues and expenditure at different levels of budget structure is analyzed in more detail by S. Dneprovskaya, S. Sinelnikov, I. Trounin, S. Chetverikov (2001)

22 It should be mentioned that the point is not that transfer growth results in regional expenditure increase and tax reduction but that within given symmetrical transfer model the region has no incentives to manipulate actual revenues and expenditure value in order to gain the increase in the transfer.

23 As it will be demonstrated below, estimates given to Russia for the period of 1997-1999 prove A value to be positive.

24 If > but A<0 the region proves to be a transferee, when actual tax revenues and expenditures exceed a certain value, i.e. *>0 where 0=.  If *<0, the region proves to be a donor and increase in γ leads to increase in the volume of resources taken from its budget while performing interregional redistribution. In this case γ growth results in budget constraint shift downwards. In any case tax burden grows and any modification in expenditure value depends upon the correlation between income effect and substitution effect.

25 See Juravskaya (1998)

26 To be precise, the model analyzed above results in a more strict definition of negative fiscal incentives. If it could be assumed that while shaping budget equalization formula, the federal government is aimed at the increase in regional welfare (the increase in public and private goods consumption in proportion correspondent to public preferences) but at public goods supply avoiding negative influence exerted upon tax revenue (per capita), then fiscal incentives would prove to be negative, when any modification (increase or decrease) in transfer value or in transfer allocation formula leads to tax revenue reduction and (or) budget expenditures decrease. Besides, tax and expenditure derivative with respect transfer value determines the intensity of the incentives.

27 Similar to shaping theoretical model, the empirical analysis in its turn also happens to be deflected from the fact that it is however not public goods provision formation that regional budget expenditure is directed to.

28 See Batkibekov, Kadotchnikov, Lugovoy, Sinelnikov, Trounine (2000)

29 For more detail see the report on Normative expenditure needs for the Federation Subjects in Russia (1999).

30 Thus, for 1997 transfer calculated on the basis of 1995 data after-equalization tax value equals 7,094, γ=0,340, the adjusted R2 for corresponding regression equals 0,487.

31 The 'normative' variables happen to have a high correlation coefficient with both actual revenues and actual expenditures as well as with the deviation of the latter from the normatives.

32 By the year 1998 actual transfer value allocated to the regions seized to correspond to the amounts from the Budget law, and the transfer amount was defined by the Ministry of Finance and the Government while budget execution. It should be also noted that in 1998 the Presidents’ decree On the Sanitation of Public Finance and the Conception of interbudgetary relations reform in the Russian Federation aimed at the enforcement of rules and conditions of financial aid allocation, were adopted.

33 Within different years this group included from 25 up to 50 regions.

34 see chapter 10 Structuring Tax Liabilities Dynamics, Regional Fiscal capacity Calculations in S. Sinelnikov, etc.The Problems of Russian Taxation: theory, experience, reform

35 see,e.g., I. Trunin et al. "Elaboration of Budgetary Norms and Methods of Estimation of Inter-regional Differentials in Expenditure Needs in the Russian Federation" in "Developing Interbudgetary Relations in Russia", IET, Moscow, 2000

36 See Cullis and Jones (1998), pp. 321-326

37 see Gramlich (1977), pp. 282-290.

38 See Niskanen (1968).

39 See King (1984).

40 See Oates (1979)

41 See Quigley and Smolensky (1992)

42 Besides, the modification in tax revenue and expenditure value does not only depends upon the parameters of the financial aid formula but also upon the dynamics of regional development economic indexes. (Thus, revenues and expenditure reduction in most regions in1998, if compared to 1997, was largely determined by the autumn financial crisis of 1998.)

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