This title presents an authoritative collection of the most significant papers on fiscal federalism and local finance. In addition to some classic papers, it offers clear and insightful presentations of conventional wisdom in the field as well as recent papers which illuminate important issues and point the way to ongoing research. Topics covered include federal tax structure and the division of fiscal functions among levels of government, the effect of local taxes on economic growth, the systems of governmental grants, income redistribution, the theory and practice of local finance and fiscal decentralization in developing countries and transitional economies.
Financing Decentralized Expenditures presents new original research papers on the structure of intergovernmental fiscal relations in virtually all types of countries and the design and implementation of transfer mechanisms between different levels of government.
Financing Decentralized Expenditures presents new original research papers on the structure of intergovernmental fiscal relations in virtually all types of countries and the design and implementation of transfer mechanisms between different levels of government.
Financing Decentralized Expenditures presents new original research papers on the structure of intergovernmental fiscal relations in virtually all types of countries and the design and implementation of transfer mechanisms between different levels of government.
We examined a setting where decision making about financing a given amount of government spending is decentralized. Seigniorage is the residual tax that passively adjusts to meet the budget constraint. We place this budget making process in a repeated game setting and characterize the cooperative tax-seigniorage function. Three main results are (1) Seignioiage and transitory changes in output are positively correlated. This result holds after controlling for changes in government spending. (2) A positive (negative) covariation between current period government spending and transitory output strengthens (weakens) the positive relationship between seigniorage and transitory output. (3) Seigniorage is negatively correlated with trend output growth. Time series empirical tests using annual data for 20 OECD countries support the first two results. A test using cross-section data on 75 countries confirms the third hypothesis. Copyright 1997 by Ohio State University Press.
A model of a central government and two local governments is used to study the role of fiscal federation in reducing the effect of revenue externalities between local jurisdictions. Immobile consumers buy goods in both their own and the other local community and pay sales taxes in each community. Depending on demand parameters, the fiscal externality may be positive or negative. In the former case, the local governments set tax rates below those a central government would choose. With a positive revenue externality, the central government can use the same tax bases as local governments to finance revenue sharing grants, stimulating local public expenditure, and thus raising welfare. If communities are heterogeneous, this revenue sharing system will not be fully optimal, but it can dominate a system of exclusive central revenue collection.
The author reviews the conceptual basis for fiscal equalization transfers, analyzes the theoretical implications for optimal design of equalization transfers, and suggests quantitative approaches for assessing the fiscal needs of subnational governments and determining their entitlement to transfers. The author illustrates proposed methods using data for local and provincial Canadian governments. The proposed methods could be useful tools, he says, for undertaking systematic objective reviews of aggregate and sectoral public spending in developing countries. The author argues that in a decentralized federation, fiscal inefficiencies and inequities arise because of subnational governments'differing levels of ability to provide comparable public services at comparable tax rates. Fiscal equalization transfers that reduce or eliminate differentials in net fiscal benefits create a rare instance in economics when considerations of equity and efficiency coincide. These transfers must allow for differences in the spending needs and revenues-raising abilities of the various subnational governments. The author argues for a two-tiered approach to equalization. The first tier would be a federal responsibility to equalize the burden of federal taxes. The second tier would be an interprovincial equalization fund to be administered by the Council of Provincial Finance Ministers. It would entail a comprehensive equalization system that takes into account provincial spending needs. The standard of equalization would be negotiated.
Fiscal decentralization in many guises has become a central concern around the world. This paper discusses several aspects of this complex subject that have turned out to be important in policy work on the issue in a number of countries. First, I discuss briefly the meaning and rationale of fiscal decentralization. There is much that has to be disentangled before one can approach the issue in a particular policy setting, including distinguishing between the problems of federal finance and fiscal federalism. Second, I review the issue of the choice of local revenue sources from the perspective of establishing efficient local governments, including the roles of user charges, property taxes, and income taxes. Finally, I sketch some considerations with respect to the design of intergovernmental transfers from the same perspective, with particular emphasis on the desirability in many settings of transfers that are both conditional and equalizing.
Local government Gordon Hughes and Stephen Smith Many OECD countries are uncomfortable with the structure and financing of their decentralized governments. In some, the pressures for change have even led to tax revolts. Much of the existing economic literature on decentralization considers that the purpose of local governments is to decentralize decisions. Lower tiers of government are assigned local public goods and matching taxes. This contrasts with actual arrangements. The patterns of government decentralization in OECD countries are diverse. Most local governments in Europe actually perform a major administrative role, in effect acting as agents for the central government. While this is justified by the advantages that local governments have over central governments in terms of information and control by voters, such arrangements require large financial resources, and more control by central government than where local governments simply provide local public goods. A drawback is the potential for conflict between different tiers of government. The trend towards more decentralization, common to most countries, has had to be met by more taxation or more grants. The need for revenue has encouraged a move away from property taxes to broader-based local taxes. Tax-sharing arrangements have often been under-rated, but in practice they compare favourably with complex and discretionary systems of transfers between levels of government.
Abstract Decentralization is an increasingly fashionable theme in the development literature. This paper attempts to distil from experience in a number of countries some basic considerations that should be taken into account by would‐be decentralizers with respect to intergovernmental fiscal relations and local taxation. After a brief review of the nature of the problem and the economic case for decentralization, four basic principles of reform—transparency, stability, flexibility, and incrementalism—are put forward as useful guidelines to the restructuring of governmental finances and functions that seem needed in many developing countries.
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.
ABSTRACT For a nation composed of independent regions, the effects of local tax competition for business investments are examined. It is first shown that atomistic regional authorities tax only local resources to finance the provision of public services to business. Thus, an efficient interregional equilibrium is induced. Various political/institutional constraints are shown to cause misallocation of the capital stock and an inefficient provision of public services. The characterization of the inefficiency is shown to vary widely, depending upon the constraint under consideration.
This paper addresses the question of whether, in the context of decentralization among levels of government, an output or performance subsidy is demonstrably superior to a cost subsidy as a tool for influencing the behavior of a local unit. Grants-in-aid for example are cost subsidies; are they therefore inherently inferior incentive devices? The answer suggested to this question is that a performance subsidy may be superior to, equal to, or inferior to a cost subsidy depending upon three factors: (1) the technology of local production, (2) the optimizing behavior of local officials, (3) the equity objectives of federal government.
TN ORDER to achieve the benefits of decentralization in decision-making, many corporations have developed divisional organizations in which some or all of the separate divisions are virtually autonomous centers. This paper is concerned with the problem of pricing the goods and services that are exchanged between such divisions within a firm and with how these prices should be set in order to induce each division to act so as to maximize the profit of the firm as a whole. The problem is an important one, because the prices which are set on internal transfers affect the level of activity within divisions, the rate of return on investment by which each division is judged, and the total profit -that is achieved by.the firm as a whole. Two recent papers which have drawn attention to the crucial importance of transfer-price policies have also discussed alternative approaches to the problem.' The paper by Cook recommends the use of market-based prices, at least as an ideal, while Dean favors negotiated competitive prices. Such brief description does not, of course, do justice to either of the articles, both of which were more concerned with drawing attention to the importance of decentralization and transfer pricing than with rigorous determination of optimal transfer-price rules. The argument made in the present paper is that market price is the correct transfer price only where the commodity being transferred is produced in a competitive market, that is, competitive in the theoretical sense that no single producer considers himself large enough to influence price by his own output decision. If the market is imperfectly competitive, or where no market for the transferred commodity exists, the correct procedure is to transfer at marginal cost (given certain simplifying conditions) or at some price between marginal cost and market price in the most general case.2