Economic decentralization emerged as an issue in Albania following the first election of a noncommunist government in Albania in 1992. It is one of many challenges in creating a fiscal system that supports reform. Decentralization has begun with the central government's transferring spending responsibilities primarily for some local infrastructure services to local governments. But, given Albania's small size, it is unclear whether"people"services such as education and health care need to be delegated to local governments. Although the destruction of local health and education facilities accompanying the demise of the old regime argues for giving communities a greater sense of ownership of these facilities, they should not be handed down without mechanisms to ensure uniform service standards. Draft laws focus on the transfer of assets (schools and clinics) to local jurisdictions but are vague about responsibilities for recurrent spending. And because local spending responsibilities are expanding, local governments need increased revenues to finance them. Providing an adequate social safety net is vital in Albania - the poorest of the economies in transition - and the government has taken steps to ensure that parts of it are locally administered, though centrally funded. The key to a well-designed intergovernmental financial system is to clearly define spending responsibilities so that a revenue system can be designed to accommodate them. Such a system would combine revenue-sharing, own-source revenues, and intergovernmental transfers. Tax-sharing of central government revenues based on district of origin cannot be the only means of local finance in Albania, as most revenues are collected in only a few districts. To meet financial needs, local governments need some authority over significant own-source revenues (such as user charges and property and vehicle taxes). Privatization revenues can also help local governments but only in the short run, as they are nonrecurrent. Matching grants with spillover effects may be appropriate. And for low-income regions incapable of meeting their spending needs alone, a transparent, equalizing transfer system should be developed. Albania's draft laws allow for this possibility, having established constituent and independent budgets for the local level.
Extensive decentralization, both political and fiscal, is taking place in many of the countries newly emerging from behind the socialist veil. Decentralization represents both a reaction from below to the previously tight political control from the center and an attempt from above to further the privatization of the economy and to relieve the strained fiscal situation of the central government. Although there are of course many variations in this process from country to country, some important common elements arise from the similar institutional starting point in all countries and the common transitional problems most of them are facing. The on-going reforms of subnational finance in the transitional economies are more important than seems generally to be recognized. The design of a well-functioning intergovernmental fiscal system is key to many of the major reform goals of the transition economies—macroeconomic stability, privatization, and the social safety net.
In the past decade, there is an emerging trend for the use of game theoretical framework in studying government tax plicies. The game theoretical approach allows the possibility of simultaneous interactions between government policy and decentralized private decisions. This paper develops a stochastic differential game between the government and the public. The public chooses an investment strategy to maximize the present value of income net of tax and investment expenditures. The government controls the tax system and aims at maximizing a weighted sum of tax collected, the level of bonds outstanding and income net of investment expenditures. Two dynamic processes — one for the capital formation and the other for bonds accumulation — are present in the model. The dynamic processes are subject to stochastic shocks. A feedback Nash equilibrium solution of the game is obtained. The parabolic partial differential equations characterizing the value functions of the game equilibrium is solved explicitly. Closed-from solutions of the equilibrium investment strategy and tax policy are provided. The stationary (longrun equilibrium) joint density function of capital stock and bonds is also obtained. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
The decentralization of government in Eastern Europe represents a reaction both from below (to tight central political control) and from above (to privatize the economy and relieve the central government's fiscal stress). In all transitional economies, the developing structure of intergovernmental relations is intimately related to such critical policy issues as privatization, stabilization, and the social safety net. In the fiscal sphere, tax reform, deficit control, and intergovernmental finance are a tripod. Unless each leg is set up properly, the whole structure could collapse. The present strategy of devolving expenditures downward while holding back on revenue flows and transfers to balance the central budget is unlikely to succeed for more than a year or two at best. Net spending reductions at the subnational level may be difficult to achieve. From 10 to 40 percent of outlays go to the subnational sector, and in many countries local governments provide much of the social safety that makes the pain of the economic transition politically tolerable. And, most housing and many enterprises have been shifted to local ownership, with the maintenance and subsidy cost this implies. Since the revenue sources assigned to local governments cannot finance expected levels of local activity, the result of shifting spending downward is likely to be strong demands for increased, rather than decreased, transfers. Alternatively, subnational government may look to coping mechanisms such as holding on to their enterprises (which provide vital social services), developing extrabudgetary revenues, or borrowing. These coping mechanisms threaten privatization, reduce budgetary transparency, and impede stabilization policies. The authors describe the risks to privatization, to macroeconomic stability, and to an adequate social safety net that present policies toward local government may imply. Its themes are that the subnational sector needs to be more realistically factored into national plans - and that subnational expenditures be more clearly assigned and revenue needs more realistically assessed. Such assessments are likely to acknowledge a larger sphere for subnational governments and the need for access to more robust revenue sources. Giving local government a share in the personal income tax is one possible and perhaps desirable approach to meeting these revenues needs. Careful attention needs to be paid to the design and implementation of the intergovernmental fiscal transfers likely to remain prominent features of the intergovernmental landscape for years to come. Caution is also needed on borrowing by subnational government. Consolidating and integrating extrabudgetary funds at the subnational (and national) levels is crucial to enhanced budgetary transparency and macrostability.
The 1980s were a decade of federal fiscal devolution. Federal cutbacks reflected the Reagan administration's commitment to decentralization and the realities of federal budget deficits. Cutbacks increased fiscal pressure on state and local governments, while restrictions on their borrowing capacity made it more difficult to use long-term tax-exempt debt to raise revenue in the short term. These restrictions also made it more difficult to finance public-private partnerships. To cope, state and local governments improved management techniques, transferred functions to the private sector and to other units of government, diversified their revenue systems, and looked for more discretionary revenue. Revenue enhancement was often limited by restrictive statutes, intergovernmental competition, and public opposition. Growing cynicism about the fairness of taxes prompted passage of the Tax Reform Act of 1986. This act significantly affected state and local taxing and borrowing. It did little, however, to allay state and local fears that the federal government would continue to capture more revenue for itself. As we enter the 1990s, the major question will undoubtedly be, Which governments can or should pay for what?
The Reagan administration’s “New Federalism” agenda focused on redirecting national priorities and decentralizing domestic programs through budgetary policy. This research analyzes the consequences of national policy shifts occurring over the decade of the 1980s for public education. Utilizing a multimethod research design, it addresses four fundamental questions: (a) What have been the federal investments in education during the Reagan years? (b) How has the overall Department of Education (ED) budget fared over this time? (c) How have individual programs in ED been affected? (d) In sum, what fiscal changes have occurred in education during the Reagan presidency and to what extent have devolution and diminution in federal education policy been influenced by the Administration’s policies? The author finds significant shifts have occurred in federal education policy and finance during the 1980s. Tax reductions, deficit financing, dwindling productivity, and an uncertain economic outlook indirectly accomplished what could not be otherwise achieved, and set the basis for a new era in national education policy and finance well beyond the Reagan years.
Two aspects of Western public finance, the economic theory of federalism and public choice theory, have insights that, if adopted in the Soviet Union, could help improve its resource allocation to permit economic growth, mitigate the problems it has with its minorities, and aid the transition away from a centralized, Communist-Party-dominated State and society. The economic reforms proposed by Chairman Mikhail Gorbachev are briefly summarized and criticized in the context of a summary discussion of governmental decisionmaking in the Soviet Union. Lessons are identified from the U.S. historical experience that suggest certain steps to improve local government as necessary preconditions for improving Soviet economic efficiency. These are free local elections, a free local press, an independent judiciary with real authority to protect the integrity of the press and local elections, real decentralization of political power to the regions, steps toward equalization of fiscal capacity among the regions, increased citizen mobility, and adoption of actions to provide incentives for Western investment in local government capital formation. This last precondition requires a convertible currency. (To achieve a convertable currency may require other economic and political changes that are beyond the scope of this paper.) Aspects of the paper rely on information publically available through mid-1989.
This paper analyzes one method governments employ to circumvent the discipline of a competitive system of fiscal federalism - intergovernmental collusion in the form of intergovernmental grants. Grants, it is argued, serve to encourage the expansion of the public sector by concentrating taxing powers in the hands of the central government and by weakening the fiscal discipline imposed on governments forced to self-finance their expenditures. The results reported suggest that intergovernmental grants do encourage growth in the public sector. The results offer further support for the use of monopoly government assumptions in public sector modeling.
In a decentralized fiscal system, it has been suggested that socio-economic characteristics have a more profound impact upon the fiscal system than do the political variables. However, in a centralized fiscal system, local government finance is constrained not only by limited local autonomy by the central government but also must respond to local demand influences on fiscal behavior. It is of interest to assess the responsiveness of the local government fiscal behavior to local socio-economic characteristics. The variation in the municipal fiscal system are analyzed using data from municipalities in Thailand during 1979-1982 as a case study. The reason for using municipalities as the case study is because of their relatively greater degree of autonomy over their fiscal systems. This study divided the municipalities into three types, namely, Nakorn, Muang, and Tambon, according to the central government classification. The purpose of this study is to explore the relationship between municipal fiscal systems and differences in local socio-economic conditions. The municipal fiscal study here includes both revenue and expenditures. On the revenue side, the study analyzes the variation of municipal revenue from both tax and non-tax revenues. On the other hand, the municipal expenditure included in this study are services required by the central government, i.e., primary education, public administration, public works, public health services, public safety, sanitation, central and specific funds. The variation of each revenue and expenditure is studied in terms of its relationship to income, relative size of the municipal population, and population density. Because of data limitations neither a behavioral function nor a budget constraint could be specified to obtain a formal demand equation. Therefore, the results of the statistical estimation of the model employed can only be interpreted as a measure of the systematic variations in municipal fiscal systems, not the determinants of the levels of these revenues and expenditures. The results show that while there exist differences in the level of revenue and expenditure in each type of municipality, the socio-economic variables are generally not significant in explaining the variation of revenues and expenditures. The political factors have a considerably larger effect on the variation of municipal fiscal systems. One of these factors is the previous year revenue and expenditure level.
The property tax has perplexed and frustrated economists for decades, and for most of this century it has been denounced as an unjustifiable relic of the Middle Ages, which has unaccountably survived into modern times. The property tax is in fact the oldest tax in any modern system of public finance, and because of its age it has been associated with both modern and premodern tax philosophies. This essay explores the political context of the property tax in its medieval and modern settings--i.e., before and after the seventeenth-century revolution in political philosophy that gave birth to liberalism and "political economy." That revolution altered our understanding of the purpose of the state, bringing corresponding changes to our understanding of public finance. The modern property tax is a legacy of that revolution. But the modern property tax is mostly a legal facade, concealing a very different tax behind it. The de facto property tax, made possible by decentralized administration and by informal and illegal assessment procedures, carries forward into modern times much of the tax in its premodern form. When Seligman and other economists denounced the property tax as "medieval," therefore, they were more right than they knew. It is argued here that many of the problems associated with contemporary property taxation are traceable to this confusion between the "legal" and the "real" property taxes, and that the public might be better served by a tax openly based on premodern principles.
ABSTRACT Nearly every OECD country has faced a scissors crisis in public finance since the worldwide depression of the mid-1970s; in slow growth economies public spending has been rising faster than tax revenues. In response, a great variety of methods have been employed to control public spending. Governments have sought to: impose global ceilings on spending; modify indexation rules; decentralize decremental decisions among government agencies; improve cash flow management; devise balanced packages; introduce new constitutional rules; provide incentives for retrenchment; and privatize public sector activities. Efforts to impose cuts in spending have been directed at the bureaucracy; transfer payments; subsidies; local and regional government; and quangos. The conclusion emphasizes that retrenchment policy presupposes a shift in the balance of power between guardians and spenders.
A bstract . The fiscal crisis of particular central cities has been primarily caused by social and economic decentralization within metropolitan regions. This hypothesis is examined through a case study of the Bridgeport, Connecticut metropolitan region. Middle and upper income groups have moved from the central city of Bridgeport to its suburbs while the poor remain. Business and industry have also decentralized. These factors weaken the capacity of the central city to generate sufficient revenue from its declining share of the region's taxable resources. The central city must fund a wide range of services and faces, as all local governments do, increased costs. Because of these fundamental social and economic changes , the central city cannot meet its service commitments. Unless the existing system of public finance is altered, continued decline is inevitable.
Analysis of the pure theory of public expenditures reveals a pathological case of market failure. That is, goods with the “double polar” characteristics of joint supply and the impossibility of exclusion are such that their production will occur only under public organization (collective supply). Yet, in itself, the pure theory of public finance constitutes neither an economic rationale for the state nor an adequate economic theory of government expenditure. An economic theory of the state, consistent with the traditions of individualistic economics, may be developed around the assumption that the state aims to maximize societal economic welfare defined in terms of conformance with individual preferences. 1 If market-determined prices are presumed to be the primary way in which preferences are manifest, such a theory requires a thoroughgoing description of all sources of failure of decentralized markets coupled with an analysis of the potentialities of various government policies to deal with these failures. The analogous economic theory of public expenditure must elucidate the specific role of government budgetary outlays as one among various state actions intended to deal with market failure. Further, it must distinguish public expenditures whose purpose is to subsidize households and private market organizations from those government expenditures for goods and services which then are either provided through collective organization and supply or are sold by the state. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
completely from the question of why households decide to live within a particular jurisdiction. Although we have no satisfactory thleory of urban local government, economists have not been reluctant to propose reforms in existing institutions. Advocates of metropolitan government suggest that decisions must be made at the metropolitan level if externalities are to be internalized and economies of scale realized. Tn contrast, the proponents of decentralization argue that further political fragmentation is required in order to provide greater variety in local public services. The only consensus, if any exists at all, is that present institutions of local government are inefficient. However, nowhere in the literature do we find an explanation of why, in view of this inefficiency, change is so rare. Annexations to the cen-tral city, relatively common at the turn of the century, ceased rather abruptly in most metropolitan areas after 1918. Subdivision of the larger political jurisdictions in our metropolitan areas does not appear at all likely. Thus, it seeins reasonab)le to ask of an adequate theory of metropolitan political economy an answer to the question: why are existing jurisdictional bourndaries so impervious to change? To answer this question we must investigate the impact of local governmental structure not only on allocative efficiency but on the extent of redistribution from rich to poor as well. In a recent study of suburbs in the Philadelphia metropolitan area, Williams, et al. [5] report that, when heavy expenditures were involved, wealthy communities were unwilling to enter into cooperative agreements with less wealthy communities. Only when their wealth was about the same would cities agree to engage in a jointly financed program. Across the United States, proposals for nietro-