In many countries the decentralization of spending responsibilities has outpaced the decentralization of revenue powers. Sub-national governments have then to rely on transfers from the center and borrowing to finance their spending. When this occurs, we find that the overall fiscal deficit tends to increase. This result is based on cross-country econometric evidence from OECD countries, and is particularly strong in the presence of regional disparities. Fiscal discipline can be strengthened by ensuring that sub-national taxing powers are adequate to meet spending obligations.
The conversations about fiscal federalism, decentralization and devolution have been evolving in the literature since the second half of the 20th century. In the United States and all around the world, the matter of governance and decentralization are on the agenda. This paper aims to find the routes of fiscal federalism by first understanding what is meant by federalism, as it does not simply refer to a form of governance, then laying out the classical foundations of this theory (trumped by Wallace Oates), and followed by some departures from the classical thoughts into some new streams of literature on the matter.
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Key words:Â Public finance, fiscal federalism.
This paper explores the mechanism of China's tax growth within a framework of intergovernmental competition.Tax Competition takes place through endogenous tax collecting efficiency.Horizontal competition tends to lower the effective equilibrium tax rate,while vertical competition has the reverse effect.Since the 1993 tax reform,concentration of tax revenue to upper-level governments and regulation of local public finance imposed by the central government,have led to stronger vertical effects and relatively weaker horizontal effects.The paper offers us not only a new perspective to understand China's fiscal decentralization,but also an efficiency principle to design optimal tax sharing system.
The government administrative expenses has the dual attributes: on the one hand,too much spending is harmful to economic growth,making local governments in a disadvantaged position in competition and doing harm to the promotion of officials,and goes against the macro-policy objectives of China Central Government at the same time;but it can improve the economic well-being of local government officials.Therefore,local governments face a dilemma on the issue of administrative expenses.This paper uses the panel data from China's 30 provinces(including autonomous regions and municipalities) from 1998-2006 to conduct empirical analysis and robustness test of the relationship between fiscal decentralization and administrative expenses.The main conclusions are as followings: In China's institutional environment,with the expansion of local government fiscal expenditure discretion,the overall effect is the increase of administrative expenses.There is a significant positive correlation between the number of administrative staff and the amount of administrative expenses.The level of regional economic development,resource endowments,and social structure has significant impact on local government administrative expenses.In the context of public finance reform,the other items of public expenditure(except for social security expenditure) have significant crowding out effect on administrative expenses.
Published in: Jorge Martinez Vazquez. Local Finance in Latin America in <em>Local government finance : the challenges of the 21st century : second global report on decentralization and local democracy : GOLD II 2010 / United Cities and Local Governments</em>. 191-229. Cheltenham, UK ; Northampton, MA : Edward Elgar, 2011. (c) United Cities and Local Governments, published by <a href="http://www.e-elgar.co.uk/">Edward Elgar Publisher</a>. Posted with the permission of the publisher for personal use only.
Based on analyses on the usage and sources of the loans of local government-backed financing vehicles, this paper discusses the challenges of public capital financing that local governments in China face. Recently rapid increase of the loans of local government-backed financing vehicles could induce serious risk to local governmentsâ fiscal stability. The authors argue that the traditional thoughts focusing on inappropriate fiscal decentralization might not bring to light the core problems concerning local government-backed financing vehicles. This paper suggests that the problems indeed reflect the deficiencies of the public capital financing and investment system of local governments in China. Currently, a comprehensive solution is needed in order to establish a sustainable public capital financing system. The authors insist that a public capital financing system based on municipal bonds would be more efficient. Meanwhile, a rigorous public capital budget constraint would be indispensable to maintain local governmentsâ fiscal sustainability.
We contribute to the literature on the political determinants of regional financing by analyzing the case of Spain, a largely decentralized country. Using a dynamic panel data model, we argue that the rise in relative bargaining power of regional parties in Spain can partly explain the increase in budgetary allocations to regions observed during the period 1986 â 2006. In particular, our results show that the rise in parliamentary representation of the nationalist Catalonian party, measured by the Banzhaf voting power index, has been a significant factor in ensuring increasing financial resources to regional governments. In addition, the traditional hypotheses of the political economy literature on legislative apportionment are tested for the case of Spain, with no significant results observed. The overall distribution of regional financing in Spain seems to be in general well aligned with the basic economic principles of efficiency and equity recommended for such a system.
This paper studies the relationship between R&D decentralization and financial performance. It examines also the impact of this decentralization on earnings management. To specify what does matter in the decentralization of the R&D we try to examine the relationship between centralization or decentralization of the R&D and the firmâs performance on one hand and the earnings management as measured by discretionary accruals on the other hand. We use two internal finance indexes (internal cash flows, internal market capital) and two mechanism of governance (stock-options, institutional investors) to explain the determinants of the R&Dâs strategy.Using a sample of 160 U.S. Multinational companies (MNCs) between 2001 and 2006 our results show that MNCs decentralize their R&D for dual goal to improve firmâs profitability or performance and to help manager to manage earnings in their own interest. Moreover, despite the fact that R&D decentralization has a positive impact on performance, institutional shareholders and performance-based compensation encourage managers to decentralize their R&D in order to spur their opportunistic behavior.
China has been carrying out a significant fiscal decentralization policy for over three decades. However, reforms have largely concentrated on the revenue side of budgets, and generally they have not been coordinated with an explicit strategy for the decentralization of expenditure assignments. Although significant strides have been made in the areas of tax assignments and tax administration, other areasâin particular, the assignment of government functionsâhave advanced much less. Yet a stable, efficient, and fair decentralized system of public finance in China will require an unambiguous and well-defined institutional framework in the assignment of expenditure responsibilities among the different levels of government. The assignment of responsibilities is by no means the only condition, but it is the most important, and it should also be the first in a well-sequenced decentralization reform effort. This chapter reviews the most important current issues surrounding the assignment of expenditure responsibilities in China. In order to put those issues in the proper perspective, an overview is provided of the general principles of expenditure assignments and the common problems encountered in the international experience. The chapter also provides a road map and practical recommendations for the reform of expenditure assignments in China.
Based on statistics data from 1987 to 2007 in China, this paper, using spatial panel data model, has conducted an empirical study of the influence factors on finance competition of local governments to foreign direct investment (FDI) inflows. The results show that tax competition and expense competition, two widely-used finance competition tools for absorbing FDI, have different promotion to FDI inflows. Expense competition is significantly positive correlated to FDI inflows, but tax competition is not significant. Furthermore, competition tool selection is correlate with time span and economic development level in China. On the one hand, judging from the time aspect, on a nation wide scale, the use of competition tools have changed from tax competition to expense competition since the 1994 fiscal decentralization reform in view of FDI inflows competition. On the other hand, judging from the regional aspect, the developed regions tend to use expense competition tool, while the underdeveloped ones remain preferential tax policy for absorbing FDI.
A recent trend in decentralization in \n several large and diverse countries is the creation of local \n jurisdictions below the regional level -- municipalities, \n towns, and villages -- whose spending is almost exclusively \n financed by grants from both regional and national \n governments. This paper argues that such grants-financed \n decentralization enables politicians to target benefits to \n pivotal voters and organized interest groups in exchange for \n political support. Decentralization, in this model, is \n subject to political capture, facilitating vote-buying, \n patronage, or pork-barrel projects, at the expense of \n effective provision of broad public goods. There is \n anecdotal evidence on local politics in several large \n countries that is consistent with this theory. The paper \n explores its implications for international development \n programs in support of decentralization.
From 1979 to 1983, a new intermediate level of government was created in Spain. This article focuses on the financial aspects of political decentralization in Spain. How much power to tax do the new regional parliaments and executives enjoy? What other sources of income do they dispose of? Which rules have been settled for regulating their tax and non-tax sources of income? Has fiscal decentralization affected fiscal discipline? Are these governments now financially autonomous? These are the questions addressed. The article shows that, with the exception of the Basque Country and Navarre, regional governments were financed mainly through intergovernmental grants during the 1980s and 1990s. However, as a result of several recent reforms, their power to tax as well as their financial autonomy has increased substantially since the mid-1990s, mainly through their participation by law in the revenues of several central taxes (known as ceded taxes) upon which they also enjoy significant regulatory rights. As the ceded taxes mechanism is not a simple revenue-sharing formula in Spain, the article concludes that the Spanish model departs from both the more uniform and top-down German model and the more heterogeneous and competitive one characterizing the taxing rights of the States in US federalism.
We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multiâunit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.
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 âreading guideâ for this new line of investigation on the influence of fiscal decentralization on economic growth.
As a way of decentralizing Public Sector, the Foral System is a clear example of Asymmetrical Federalism, since Foral Finance can apply tax measures which the rest of Spanish Autonomous Communities cannot use. From the perspective of Fiscal Federalism, the Foral System gives great tax autonomy to Subcentral Finance, but as a result the Central Government has almost no tax devices. Nowadays, this system presents serious problems regarding to the contribution to national public goods financing and the cooperation to economic stabilization. In quantitative terms, analyzing financial relations between the Foral System of Basque Country and Central Government as a whole, the paid amount underestimates more than 2500 million of euros a year the contribution of Foral Finance for period 2002-2006
This essay reviews theoretical arguments concerning the issue of decentralized redistribution. We make a representative examination of what are regarded as the merits and demerits of fiscal decentralization from a redistributive perspective, emphasizing the concepts of social solidarity. We proceed to take a closer look at the decentralization theorem, and argue that the celebrated theorem is not an appropriate framework for the issue of redistribution. We then review other merits as well, and argue that those merits largely concern the cost-efficiency of public service delivery and could be in principle exploited without compromising the principle of horizontal equity, through two forms of administrative decentralization, delegation and de-concentration. However, the local incentive problem still remains. The design of transfers and personnel control mechanism will be a crucial factor to attain the cost-efficiency of local administration.
Most companies now operate in an environment in which their products, markets, customers, employees, and technology are constantly changing. In such circumstances, the appropriate organizational form becomes important, and a decentralized organization is very common. The essence of decentralization is the freedom managers have at various levels to make decisions within their sphere of responsibility. This frequently involves determining a transfer price system within the company, which has the potential to become the most important and possibly the most interesting problem of management control. Decentralization can simulate market conditions within a company between autonomously acting subunits--i.e., they reflect competition. Managers in such subunits or have different degrees of autonomy and a range of company decisions for which they are responsible. The cost center manager is typically responsible for costs, the profit center manager for costs and revenues, and the investment center manager for generating an adequate return on investment. Because of the decentralization of decision making, the role of performance measurement and performance assessment within these responsibility centers becomes important. These issues lead to discussion and systematic analysis of transfer price functions between segments. (1) Companies often use transfer prices as substitutes for market prices either because market prices do not exist or because they do not facilitate internal trading and the synergies it creates. Even if synergies exist for internal trade, it is possible that market prices may not encourage this to happen. Thus top management often imposes a transfer price in order to benefit from these synergies. An added complication, however, is that sharing the synergistic benefits between responsibility centers is arbitrary, so the correct transfer price cannot exist. It is obvious that transfer prices affect the profit reported in each responsibility center, and, more importantly, companies can use transfer pricing to influence decision making. We will look at the functions and different types of transfer prices and their possible behavioral consequences. The analysis, which is from a managerial point of view, argues that neither a single true nor a fair price exists, but, rather, the transfer price is conditional on the decision context. Our article also highlights possible dysfunctional behavior. We outline some examples and propose possible solutions that we assess in the light of behavioral effects, highlighting how complex, difficult, and insolvable the issue of transfer pricing is in reality. In order to understand the effects resulting from asymmetric information and finding suitable transfer prices, we will first discuss the functions of transfer prices. Functions of Transfer Prices The decentralized organization is a connection of partly independent business units. An important task for management is the performance measurement and assessment of these units. This requires, for example, that the reported profit figure for, say, profit or investment centers for the relevant period, should be reliable and trustworthy. Where these business units trade with each other, the transfer pricing system has the potential to distort reported profit performance. Therefore, the internal profit-allocation function and related performance measurement of business units are crucial elements of transfer pricing. Transfer prices should also influence managerial decision making because they should provide an incentive to maximize the business units' profit targets. We refer to this as the coordination function. If managerial decisions lead to maximized profits within all the autonomous business units, then this should also maximize the total company or, in the following group, profits, ignoring tax and foreign exchange considerations. Business unit managers' decisions then are identical to the decisions that the group's top managers would make if they had all the necessary information. âŠ
Struggles over what a region receives, or should receive, from the budget of the central government are common to many countries. Discussions often focus on the measures of ânet fiscal flowsâ or âfiscal balancesâ provided by the government or other actors. This unique book shows just how these flows are computed then interpreted and clarifies the often misunderstood economic and political motives that explain why some regions receive more monies than others.
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 âlocal preferences,â 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.
Federalism research has recently seen a downright renaissance by putting the question âDoes federalism matter?â on centre stage (Kaiser 2004). Findings in this respect are, however, ambiguous so far. Some authors observe a positive influence of federalism on lower inflation rates (Lijphart 1999; Lancaster/Hicks 2000), lower unemployment (Crepaz 1996), or a higher economic growth (Lancaster/Hicks 2000), whereas other researchers do not find any effects of federalism with regard to the macroeconomic performance of political systems (Lane/Ersson 1997; Castles 2000).p1 In addition to disputed findings and a preference for case studies instead of comparative research, there is next to no theoretical argument in these contributions as to why federalism should or should not have consequences for policy output. Against this background, the history of federalism research has a surprise in store. The question of performance effects of federalism refers back to Ostrom (1973) who turns against Rikerâs (1969) claim that federalism (apart from more complicated decision-making) makes no real difference. Ostromâs argument rests explicitly on findings of the public finance literature (in particular Oates 1972) and the assumption that federal countries can fully exploit the advantages of a decentralized provision of public goods and services. It is therefore rather startling that federalism literature has, for the most part, neglected the dimension of economic decentralization, the more so as there appears to be no alternative basis for the purported performance effects of federalism.p2