To measure subnational governments, only external money flows are counted, excluding intra-level transactions in measuring a level of government and all intergovernmental transactions in measuring general government. Control, finance, and administration should be distinguished in measuring centralization and each level’s share of general government, administered expenditures being net of grants given to other governments and financed expenditures net of grants received. Disparate decentralization of finance, control, and administration brings vertical imbalance, measured by the portion of a government’s expenditures not covered by its own resources and by the ratio of intergovernmental grants to total government expenditures.
One strand of endogenous-growth\tmodels assumes constant returns to a broad concept of capital. I extend these models to include tax- financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.
This paper considers the relative centralization or decentralization of public finance, and relates the equity and efficiency issues to the special features of developing economies. The paper considers the centralization of taxation and service provision in Indonesia in relation to these theoretical principles and indicates ways in which we may expect decentralization to proceed in the Indonesian context.
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.
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 discusses urban services finance in the Latin American context of rapid urbanization, severe fiscal constraints and democratization of administrative systems. Analyzing the situation in thirteen different countries, it draws several conclusions which may be helpful in the design of new lending operations. The report's main theme is that the World Bank's approach to the urban sector needs to be re-directed. The structure of the report is as follows: first it reviews the rising demand for urban services, noting the positive correlations of rapid urban growth with national development, but also the corresponding, incremental fiscal pressures. The macro-economic constraints to urban expenditures are summarized and the adverse circumstances limiting new capital formation and service provision in Latin American cities is mentioned. The report also discusses whether Latin American governments are truly decentralizing and reviews the strategies to relieve the fiscal gap of subnational governments, including changes in the existing systems of revenue sharing, reassignment of public service functions, pricing adjustments, deregulation or privatization of certain services, technical assistance, and restructuring of institutional credit. The main findings and recommendations are organized according to three main groups: country concerns; theoretical concerns; and operational concerns. The text is accompanied by three case studies in Argentina, Brazil and Mexico.
Evaluating decentralization in terms of three economic criteria - social efficiency, technical efficiency, and equity - the paper argues that some decisionmaking (about finance and teacher recruitment) should be provided for at the local level, and some (about school organization and curriculum) at the regional level. A system of central government grants should be used to correct problems of equity and inefficiency inherent in a decentralized system. Little is known about the economic and educational consequences of decentralization, despite a wide variety of country experiences. The effects of decentralization are difficult to isolate, so scholars have focused instead on issues of implementation.
To this point, our conception of the mixed economy has treated the public sector as monolithic. However, we observe a considerable degree of government decentralization in practice, and indeed, we would expect to find some such structures in a second-best organizational design for much the same reasons we argued for market decentralization of private goods earlier. Here, we will develop a model of government structure that is roughly consistent with the actual organization of the U.S. public sector. We will emphasize normative properties of this structure, drawing on earlier discussions of political decentralization and mechanism design. One possible approach to public-sector design would be to mimic closely the structure of market decentralization. That is, we could divide up responsibilities into a large collection of fully autonomous agencies, each of which would be responsible for the allocation of a narrow range of collective goods. Autonomy would be achieved by having each individual agency elicit information on preferences and assess separate taxes and/or user charges. To the extent that “true” information is learned, it can be used to organize finance according to the so-called benefits principle – household payments for the collective goods and services would be directly related to benefits received. This mode of organization has many desirable features. First and foremost, it eliminates entirely the need for centralized information gathering and the associated cost of bureaucracy needed to administer and coordinate activities. Further, to the extent that the finance tax can be made a charge for services rendered, it will act like a price that will induce the relevant clientele to reveal their preferences.
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.
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.
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.
Abstract The Tunisian government has long admitted that its excessively centralized administrative and political systems have generated heavy costs in terms of inefficiency and citizen alienation. A major decentralizing reform effort was launched in the mid‐1970s, the most important parts of which dealt with changes in local taxation powers, and in the sources and size of grants and loans which Tunisian communes receive from national sources. The result to date has been a modest increase in communal revenues from the new or increased taxes, and a more significant increase in central government grants to local governments. Smaller and more rural communes are heavily dependent on grants to undertake development actions, their tax base being negligible. The revised systefn generates more revenue, and distributes resources more equitably, than the previous arrangements. In theory, it gives a greatly increased latitude to elected communal councils. Nonetheless, the local governments‐and the communes in particular‐remain severely constrained by central government authorities. The conclusion is that the decentralization reform has been partial and halting, and will in all probability continue in the same manner.
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.
When the Reagan Administration took office in 1981, it concentrated its domestic efforts upon national government spending, deficits, and inflation. Its major proposed remedies have consisted of "supply-side" economics, cuts in the rates of federal spending on non-military programs and a return to greater state/local responsibility for public policy initiatives and financing. It is with this last aspect of the Reagan proposals that the present work is concerned: the impact and policy implications of federal decentralization on Arkansas. The option of a state tax increase is explored as Arkansas' response.
During the periods of high economic growth, outmigration from agricultural and mountain villages to urban areas increased rapidly. As a result overpopulation in the urban areas and depopulation in rural areas have become social problems.The rural areas play a very important role particularly in supplying food, conserving national land, cultivating the head sources of a stream and conserving the natural environment. However, it has become difficult to manage the community and these areas have not been able to play the abovementioned roles in depopulated areas. Therefore, the Japanese government has taken a number of measures to promote rural areas and alleviate some of the problems. In this paper the depopulation problem is considered from the viewpoint of local finance. Attention is paid particularly to the role of intergovernmental grants.Firstly, using a concept of local public goods, the inefficiency which results from free migration is considered. If in moving from one region to another a migrant does not account for the effect of his moving on the tax price of the public good of residents in the region he leaves or enters, Tiebout type of decentralized free market equilibria may not be Pareto-efficient. And if this externality is not internalized by centralized decision-making, the one region may be overpopulated and the other underpopulated. In the framework of a simple model the source of inefficiency of resource allocation is shown. Using the same model the analysis is extended to consider the role for intergovernmental grants in the face of such inefficiencies. And it is suggested that the central government may be justified in using a system of intergovernmental grants to overcome these inefficiencies.In order to explore the role of intergovernmental grants, the model is applied to Agatsuma district of Gunma Prefecture, a district which includes a number of the depopulated towns and villages. Firstly, settled accounts of revenue and expenditure from 1965 F. Y. to 1982 F. Y. are investigated. The percentage of transfer payments including grants from both the Japanese government and the government of Gunma Prefecture has become very large since the laws of the depopulated areas enforced. Secondly, principal expenditures are determined for each town and village. In each town expenditure on education and promotion for agriculture and construction account for a very large percentage of total expenditure. Finally, the level of components which constitutes residents' utility is examined. There is still a difference between the levels of many components in this district and those in the other region.From the above results it is shown that the situation is going to a desired direction by various measures, particularly intergovernmental grants. However, in some areas there is still a possibility of the situation deteriorating. Therefore, it is necessary to allocate intergovernmental grants carefully as well as encouraging each local government to work autonomously.
Some important aspects of the current French decentralization are enlightened by the recent changes in US public finance. Proceeding from very different premises, the « New Federalism » and the French decentralization share in common a context of general economic slowdown and fiscal tightness. The problems that arise and their solutions are therefore often similar, in spite of conspicuous differences in the institutional frameworks. Such similarities are in broad agreement with the economic theory of decentralized governments. The case-study of the US local public finance clearly reveals the effects of the recession. After several decades of continuing growth in local budgets, the 1981-1982 recession, closely following the « Tax Revolt » movement, caused a reversal in these trends. Both the increase in needs and the decline in revenues have been aggravated by the transfer of competences and finan- cial responsabilities from the federal government to the states. An increase in state and local taxes could not be avoided. And, in so far as some existing public services are given a high priority, other outlays had to be reduced : thus public employment shrank and public investment sharply declined.