We present a general equilibrium dynamic model in which a federal authority
redistributes resources from capital-rich to capital-poor countries to finance
public services and help poorer countries to grow. We study the effects of
commonly used federal redistributive policies on long-term growth and
dynamic stability, when national fiscal authorities either choose their tax
policies independently of each other or choose them jointly. We compare the
properties of Nash and cooperative equilibria, and show the efficiency costs
and indeterminacy associated with a combination of non-coordination and
federal transfers. The efficiency costs lead to inefficiently rapid economic
growth and indeterminacy explains income inequality in the long run.