The European Union (EU) is built on the federalist principle of subsidiarity, which we consider in the policy field of financial reporting. We attempt to answer the question, whether the current accounting regulation in Europe is sensibly balanced between centralized and decentralized decision making. Drawing on comparative accounting research to identify criteria for “local preferences,” we conclude that local solutions currently remain preferable for small and medium-sized companies. For them, a centralized solution would result in additional costs for at least some member states and their residents. Large international firms, in contrast, face an increasingly integrated capital market and rather need a central solution as currently implemented by the EU. However, recent developments in corporate finance may align local preferences on accountancy in the future.
Informal payments are a frequently overlooked source of local public finance in developing countries. We use microdata from ten countries to establish stylized facts on the magnitude, form, and distributional implications of this "informal taxation." Informal taxation is widespread, particularly in rural areas, with substantial in-kind labor payments. The wealthy pay more, but pay less in percentage terms, and informal taxes are more regressive than formal taxes. Failing to include informal taxation underestimates household tax burdens and revenue decentralization in developing countries. We propose a simple model of information and enforcement constraints that parsimoniously explains the patterns in the data.
Both theory and experience in a variety of circumstances around the world suggest strongly that if fiscal decentralization is to produce sustainable net benefits in developing countries, subnational governments require much more real taxing power than they now have. Students of public finance have studied the subject, and practitioners in developing countries have installed many different versions of subnational government tax. In most developing countries there are potentially sound and productive taxes that subnational governments could use: personal income tax surcharges, property taxes, taxes on the use of motor vehicles, payroll taxes, and even subnational value‐added taxes and local “business value” taxes may all be viable options in particular countries. Still, there is no general consensus about what works and what does not. In this review paper, we try and pull together enough evidence to suggest the way forward. We also develop the argument that given political realities one cannot usually decentralize significant revenues to subnational governments without having in place an intergovernmental transfer system to offset at least some of the disequalizing effects that would otherwise occur. Nor does it make sense to think of decentralizing exactly the same package of tax choices to all subnational governments regardless of their scale and scope of operations.
Sonia Esteban Laleona, Pablo de Frutos Madrazo, María José Prieto Jano
Traditionally, the academic debates about the benefits that the existence of multilevel government structures provide have been directly related to the gains in efficiency that derive from the processes of decentralization of the Public Sector. However, as of the last decades, the Public Finance has broadened its analysis towards other questions, one of them being if the fiscal decentralization influences positively in the economic growth of a country. The objective of this document is to provide a "reading guide" for this new line of investigation on the influence of fiscal decentralization on regional economic growth.
The book is divided into two parts. The \n first part macro federalism provides a fresh look at \n emerging constitutional challenges arising from \n globalization and the information revolution, as well as the \n dynamic-efficiency and growth implications of existing \n federal constitutions. Several aspects of these systems are \n examined: (a) institutional design to achieve internal \n economic union; (b) policies for regional development; (c) \n conduct of monetary policy; (d) coordination of fiscal \n policies, with a special emphasis on tax harmonization; and \n (e) management of risks of insolvency from sub-national \n borrowing. The second part of the book local finance \n provides a comparative perspective on local finances and \n measures the progress of decentralized governance reforms in \n developing countries.
This article analyses the relationship between decentralization and the extent of fiscal discipline in the Swiss cantons between 1984 and 2000. From a theoretical point of view, decentralization and federalism can be associated with both an expansive and a dampening effect on government debt. On the one hand, decentralized structures have been argued to lead to a reduction of debt due to inherent competition between the member states and the multitude of veto positions which restrict public intervention. On the other hand, decentralization has been claimed to contribute to an increase of public debt as it involves expensive functional and organizational duplications as well as cost-intensive, often debt-financed, compromise solutions between a large number of actors that operate in an uncoordinated and contradictory way. Our empirical results show that in periods of prosperous economic development, the architecture of state structure has no impact on debt. However, the degree of decentralization influences debt in economically poor times: In phases of economic recession, administratively decentralized cantons implement a more economical budgetary policy than centralized Swiss member states.
Compared with most countries the Norwegian system of financing local governments is highly centralized. Grants make up a substantial part of revenues and local taxes are highly regulated by the center. The development of the system was motivated by a desire to equalize service provision throughout the country. The purpose of this paper is to analyze possible consequences of more decentralized financing with local tax discretion. Contrary to the conventional wisdom the analysis indicates that decentralized financing is likely to give more equal provision of local public services. In addition, substantial efficiency gains can be obtained.
There is increasing interest in fiscal decentralization in Peru as a mechanism to generate more involved decision-making at the subnational level. This is tempered with a continuing emphasis on overall fiscal stability. However, considerable work needs to be undertaken to define more clearly expenditure responsibilities and financing mechanisms that increase local accountability. In addition, a more transparent fiscal transfer system is needed, together with clarity in expenditure management at all levels of government. The paper suggests that a substantial work agenda is needed to extend the decentralization process with greater transparency.
In the last 40 years, in public finance the examination of spatial aspects of federalism and intergovernmental fiscal relations was dominated by allocative and distributional issues. Modern growth theory and complementary approaches lead to a shift in the research perspective. Against this background the paper discusses how the findings of modern growth theory can affect the design of intergovernmental fiscal relations. The results of this analysis can be summarized as follows: (1) the existence of a geographically different growth dynamic provides an additional justification for a decentralization of political competences. (2) To cover more exactly the regional economic backward and forward linkages, especially local government authorities should intensify their cooperative behavior. (3) From the perspective of economic growth, the equalizing effect of horizontal transfers between decentralized jurisdictions should be limited.
This paper concerns redistribution and public good provision in an economic federation with two levels of government: a local government in each locality and a (first mover) central government. Each locality is characterized by two ability-types, and the ability-distribution differs across localities. The central government redistributes via a nonlinear income tax and a lump-sum transfer to each local government, while the local governments use proportional income taxes and provide local public goods. We show how the redistributive role of taxation is combined with a corrective role, and how the central government can implement the second best resource allocation. Copyright 2008 Blackwell Publishing, Inc..
Twelve years into the implementation of the Local Government Code of 1991, it is but opportune to assess how the key features of this landmark legislation has contributed to (or detracted from) achieving the balance between local autonomy and accountability. The literature on fiscal decentralization suggests that these two goals are not incompatible. In fact, real autonomy (in the sense of subnational governments being able to link their spending decisions with their revenue/tax decisions) promotes fiscal responsibility. In the context of the ongoing debate in the Philippines, however, local autonomy has been equated (by many LGUs officials) with the independence of LGUs from central government interference. As such, LGU officials have focused more on securing even higher levels of block grants in order to address the widely perceived vertical fiscal imbalance. However, closer scrutiny of the problem indicates that greater_x000D_ tax decentralization coupled with a well designed intergovernmental transfer system that includes elements of fiscal equalization and categorical grants conditional on the achievement of minimum service standards would better enhance the gains that are forthcoming from the decentralization process while minimizing the risks of macroinstability.
Die Kompetenzverteilung zwischen den verschiedenen Gebietskörperschaftsebenen eines föderativen Staates kann sich erheblich auf das Wirtschaftswachstum auswirken, da es insbesondere die Regionen eines Landes sind, die zu seiner gesamten wirtschaftlichen Entwicklung beitragen. Dies legt einen regionalen Zuschnitt der staatlichen Wirtschaftspolitik nahe. Aus ökonomischer Sicht wird in der theoretischen Diskussion hingegen vornehmlich auf die Effizienzaspekte einer dezentralen Bereitstellung und die Finanzierung öffentlicher Leistungen abgehoben. Selten findet sich das Argument, dass Dezentralität oder Föderalismus – vermittelt über eine höhere Innovationsund Reformfähigkeit des politischen Systems – zu einer Steigerung des Wachstums führen. Nach einer Diskussion der theoretischen Überlegungen zu Föderalismus und Wachstum wenden wir uns in diesem Beitrag der empirischen Frage zu, welche Bedeutung die Zuordnung von Entscheidungskompetenzen und die institutionelle Ausgestaltung des fiskalischen Föderalismus für die wirtschaftliche Entwicklung eines Landes haben. Auf Basis der bisher existierenden theoretischen und empirischen Studien zu Wirtschaftswachstum und Föderalismus werden offene Fragen und mögliche Ansätze zu ihrer Beantwortung formuliert. <bold>Abstract</bold> The assignment of competencies in a federal state can have a strong impact on economic growth, because the regions of a country particularly contribute to its total economic development. Hence, public policy should be tailored to regional needs. Public economists however mainly focus on the efficiency of decentralized public goods provision and financing; seldom arguments concerning political innovation due to a decentralized experimentation of policies and its impact on economic growth are considered. After a discussion of theoretical arguments on federalism and economic growth, the empirical question is addressed in this paper whether the assignment of autonomy and the institutional design of fiscal federalism influence economic development of a country. On this basis, open question and potential routes of research are formulated.
Konstantin Sonin, Centre for Economic Policy Research (United Kingdom)
In a federal state, political leaders of constituent units might protect their enterprises from the federal center (e.g., allowing them not to pay federal taxes). The effectiveness of such protection depends crucially on the ability of local authorities to extract rents from enterprises. They can easily do so, if there are a small number of enterprises with large employment, and local monopolies can be effectively sustained. They cannot do it so easily if regional industry is competitive, political opposition is strong, and the federal center has enough means to enforce payment of taxes. We build a simple model to argue that it is the industrial structure of constituent units that determines political relations between them and the federal centre. The theory is supported by the recent experience of Russia, China, and Argentina.
Bob Searle, Jun Ma, Stefano Piperno, Ehtisham Ahmad
Intergovernmental equalization grants have been described as “the glue that holds a nation together.” Getting the grants system right is critical to countries as they decentralize. This paper illustrates general principles with an example based on Indonesia in 2000. A general grant should be used to supplement own revenues and to finance local service provision where there are no central mandates. The special needs of backward regions would be better provided for by specific grants. Specific grants need to be taken into account in the general grants scheme.
We provide a model incorporating features of local public finance in Japan, including close fiscal ties between different levels of government as well as bureaucratic determinations of intergovernmental transfers. The discretionary nature of transfers softens local budgets ex post, which exerts perverse incentive effects on local governments ex ante. Fiscal decentralization that assigns more revenue responsibility to the local level serves to counteract this moral hazard incentive. The emphasis is on the endogenous nature of regional fiscal capacities at the local level. Fiscal devolution motivates local jurisdictions to become fiscally independent wherever possible.
This paper investigates a model where a decentralized manager gathers private information about the profitability of an investment project that must be financed internally. The choice of information acquisition effort depends on a tradeoff between her expected marginal information rent and the associated private effort cost. Expected information rents are higher if asymmetric information arises endogenously rather than being exogenous. Therefore, the manager puts in too much information-gathering effort and headquarters reacts with a sharp rationing of capital. Monitoring the manager's information acquisition mitigates underinvestment but even increases the manager's information gathering activity. Finally, efficiency unambiguously rises if headquarters can commit to an investment budget before the manager gathers the information.
Teresa García-Milá, Timothy J. Goodspeed, Therese J. McGuire
As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments bydevolving fiscal responsibility and authority to newly empowered regionaland local governments. Although decentralization in each country proceedsdifferently, a common element tends to be an initially heavy relianceon central government grants to fund regional spending. We develop atheoretical model of regional borrowing decisions in which the incentivesfor regional borrowing depend crucially on how the regions expect thefederal system of finance to evolve. We examine the implications of themodel using data on Spanish regions for the period 1984-1995 and findevidence that regions may be borrowing inefficiently in response toincentives imbedded in the Spanish system of fiscal decentralization.
This Article argues that the restoration of a communitarian approach to taxation can help soften the widespread anti-tax sentiment that has engulfed the United States. It proposes and analyzes a concrete plan for the collection of revenue that taps into the same sense of shared community sacrifice that was invoked in fourteenth-century England. It proposes that the United States adopt a modernized, decentralized system of revenue collection modeled after the requisition, which was the chief means of raising revenue in the early American republic. Whereas the federal government currently collects approximately seventy percent of the nation's tax dollars, and the state and local governments collect the remaining thirty percent, this Article contemplates how the United States, and the individual states themselves, might differ if those numbers were reversed. The article begins by explaining why, due to the historical peculiarities of America's fiscal history, a decentralized approach to collecting revenues is not currently under consideration. Further, the article proposes a tax system in which the federal government would abolish the individual income tax, and discusses the likely effects of such a program on governmental spending by the states and on citizen mobility. The Article then explores the justifications for such an approach to taxation. The Article also consists of a utilitarian analysis of the costs and benefits of shifting to requisitions finance. Finally, the Article confronts the serious policy challenges that would arise if society were to implement requisitions finance, and ends with a discussion of several variations on the requisitions finance model that can address several of the communitarian and utilitarian criticisms.
The note highlights the importance of \n sound intergovernmental fiscal relations, and proper \n regulation for successful sub-national borrowing, and \n illustrates the potential macroeconomic hazards of \n decentralizing borrowing powers, arguing that the impact of \n a possible moral hazard problem, namely, the access to \n financial markets by sub-national governments, may generate \n unplanned liabilities for central governments. Yet academia, \n and country experiences do not suggest adverse links between \n decentralized borrowing powers, and the central \n government's ability to maintain fiscal discipline, and \n macroeconomic stability. Rather the key seems to lie in the \n design of fiscal decentralization, particularly the \n regulatory framework under which borrowing powers are \n decentralized. The note outlines the reasons why \n sub-national governments require access to financial \n markets: to finance capital spending, and foster political \n accountability, which can be achieved through direct \n borrowing by central government, through a public financial \n intermediary, or, through direct borrowing. As per designing \n the regulatory framework, the note suggests better \n information systems, bankruptcy laws, and access to tax \n bases, in addition to separate fiscal/financial systems, and \n sound legislation to impose budget discipline, enabling \n access to capital markets to complement fiscal powers \n devolution to regional authorities.
This paper considers the relative centralization or decentralization of public finance, and relates the equity and efficiency issues ot the special features of developing economies. The paper considers the centralization of taxation and service provision in Indonesia in relation to these theoretical prinicples and indicates ways in which we may expect decentralization to proceed in the Indonesian context.