assignment of revenue for regional government

• [ May 28, 2024 ] Kutaisi Fourth International Forum: Beyond the Horizon/Empowering Second-Tier, Medium-Size, and Small-Size Cities Cities and urban development
• [ May 20, 2024 ] LPSA’s efforts to Elevate the Debate on Decentralization and Multilevel Governance in Africa off to a productive start Community
• [ May 19, 2024 ] LPSA Expert Working Group on Europe & Central Asia – Open Meeting, June 2024 LPSA Updates
• [ May 18, 2024 ] Decentralization in Latin America After 40 Years: Work in Progress Decentralization
• [ May 12, 2024 ] African School on Decentralisation (ASD) 2024 Africa

3. Revenue Assignments and Local Revenue Administration

3.1 relevance of revenue assignments and own revenue sources.

Although revenue sources are often less decentralized than expenditure responsibilities, tax revenues are an important source of income for subnational governments, accounting for one-third of total subnational government revenue or roughly 3.3 percent of GDP on average (OECD/UCLG 2019: 71, 77). [12] Other (non-tax) own revenue sources such as user charges, fees, and property income, account for another 11 percent of subnational revenue or approximately an additional one percent of GDP. Naturally, the importance of subnational own source revenues, and the breakdown between the different types of own source revenues, vary considerably from one country to another.

3.2 An overview of devolved (local government) revenue assignments and administration

The economics of local taxation under fiscal federalism. Unlike central government taxes (which are generally defined as compulsory payments to the central government for which there is no quid pro quo ), local government taxes in a well-designed intergovernmental fiscal system are more appropriately seen as quasi-user fees for locally-provided services. Indeed, in order to maximize social welfare and improve the allocative efficiency of resources in a decentralized public sector, the goal of local taxation is not to maximize the volume of local revenue collections, but rather, to ensure that local taxpayers in different local jurisdictions only pay local taxes commensurate to the level of locally-provided services that they demand from and get supplied by their local government. [13]

In line with the concept that “finance should follow function,” local taxes and user fees should be considered appropriate funding sources to pay for exclusive local government functions—where the benefits of local government services largely or wholly are received by residents of the local government jurisdiction itself. As noted in Section 3.3 below, to the extent that concurrent functions partially or largely benefit residents outside the local government jurisdiction, it would be conceptually more appropriate to fund such concurrent government functions in part or in whole through intergovernmental fiscal transfers.

Assignment of own revenue sources. Public finance theory prescribes a number of rather stringent conditions to determine which taxes and revenue sources should be considered good candidates for assignment to the local or regional level (Bird 2000). In fact, in line with the subsidiarity principle, the only taxes and revenue sources that could be suitably collected by subnational governments are revenue sources that (a) can be administered efficiently at the local or regional level; (b) are imposed solely or mainly on local residents; [14] and (c) do not raise problems of harmonization or competition between subnational governments or between subnational and national governments. [15]

The only major revenue source usually seen as passing these stringent tests for assignment to the local level is the property tax; the second-largest category of local revenues in many countries tends to be user fees and charges. In fact, for all other high-yielding tax sources—including personal income taxes, corporate income taxes, value-added taxes or sales taxes, and trade taxes—it could reasonably be argued that the central government is the lowest level of government able to collect those revenue sources without causing inefficiency. As a result, it is no surprise that the vast majority of revenues in most countries is collected by the central government.

Tax autonomy and the assignment of shared revenue sources. Because the practical scope for autonomous subnational taxation—in a way that ensures efficiency—is limited, some countries assign local governments the right to collect different revenue sources, while limiting the control of subnational governments over one or more aspects of these taxes. This results in a spectrum ranging from own source revenues fully under the control of local decision-makers to tax sharing arrangements over which local governments have no control (Table 3.1).

Table 3.1 A taxonomy of tax autonomy (OECD)

For instance, central legislation might provide local governments with the power to collect a certain tax – a corporate income tax, for example – while defining the base of this tax uniformly across the entire national territory in order to limit the administrative burden of local taxation on taxpayers. Similarly, central legislation may limit the tax rates that local governments may impose on local taxpayers for different taxes – for example, by setting lower and upper bounds – in order to prevent territorial or vertical tax competition. Alternatively, central authorities may simply decide to share the revenue collected from certain revenue sources with subnational governments. For example, this may be done on a derivation basis (based on where the revenue is collected) without giving subnational governments any control over the tax base, the tax rate, or the sharing rate. [16]

In addition to property taxation, another area of focus for subnational revenue mobilization efforts could be on user charges and fees. The ability of local governments to collect these types of revenues depends considerably on the assignment of functional powers; local institutions’ ability to deliver local services in way that provides value-for-money; and on the capacity and willingness of users to pay for these services.

3.3 An overview of non-devolved revenue assignments

Traditionally, the discussion of revenue decentralization and the assignment of revenue powers has focused almost exclusively on the local property tax and any other local tax and non-tax revenue funds that are part of the local government budget. Virtually no systematic attention has been paid to the assignment of revenue powers to non-devolved actors in the intergovernmental system. This includes any discussion or analysis of revenues collected by national parastatal entities, authorities and funds—revenues collected by entities that are funders or providers of delegated services. Also overlooked are revenues collected by local government-owned public companies, delegated service providers, and other “last mile” providers such as local water utilities, transit companies, or fee-collecting local health facilities. All these revenues are typically excluded from measures of revenue decentralization, as traditional measures of revenue decentralization focus exclusively on national government revenue collections and local government revenue collections. Any revenues collected by off-budget entities at both the central government and local government levels are often simply overlooked. [17]

While the reliance on non-devolved revenue sources is likely to vary significantly from country to country and from sector to sector, these revenues are likely to play a much more significant role than commonly recognized. For instance, in the provision of public health services, how much do local health facilities collect in terms of user fees or private or social health insurance payments in a way that is not captured by local government accounts? In turn, how much revenue do national or local health insurance schemes collect from the public? Similarly, to the extent that schools collect school fees from parents and/or to the extent that school committees or parent-teacher committees, as quasi-public entities, contribute to the provision of primary education, how significant is this funding? [18]

In the provision of water and sanitation services, what is the total revenue collected each year and subsequently spent for recurrent operation and capital purposes by off-budget urban water utilities? Similarly, in rural areas, what revenues are collected by water user committees which, in many countries, serve as the de facto provider of rural water services? Both of these questions should be answered fully to get a comprehensive picture of water and sanitation revenues. It is not unusual, however, for the accounting of water and sanitation revenue and spending to focus exclusively on capital investment spending, and to ignore the revenues and expenditures needed to operate and maintain water and sanitation infrastructure.

Likewise, to the extent that roads and other transportation infrastructure may be operated in an off-budget manner by a national road fund (often funded by a fuel levy) or by dedicated transportation authorities or public-private partnerships (PPPs), what are the fuel levies or road tolls that are collected by these authorities or entities that operate and/or maintain public sector roads or bridges?

3.4 Common obstacles in domestic revenue mobilization and subnational revenue administration: technical challenges

Local own source revenues are seen by many as a preferred source of funding for local government services. This is not only because there is a stronger conceptual link between the benefits and costs of locally-provided services, [19] but also because local taxpayers are expected to exert stronger oversight over the efficient spending of their own local tax contributions. Furthermore, revenue decentralization gives subnational governments a fiscal stake in the economic success of their jurisdictions. As a result of these factors, the failure to decentralize revenue powers while decentralizing expenditure responsibilities is generally assumed to result in greater local fiscal indiscipline and risk taking.

But, the evidence on this point is mixed. Given the fact that the collection of most major revenue sources—with the exception of property taxes—is generally assigned to the central government in line with the subsidiarity principle in revenue administration, virtually every country in the world faces a significant primary vertical fiscal imbalance. In many countries, the assignment of shared revenue sources on a derivation basis, or the introduction of local surtaxes or piggy-back taxes is often able to reduce the vertical fiscal gap in a way that provides resources to subnational governments without the potential inefficiencies associated with full revenue decentralization (Hunter 1977).

Nonetheless, lackluster collection of local taxes and other own source revenues in many local jurisdictions is common, particularly in developing and transition countries. Analyses of local revenue performance frequently attribute the lack of local revenue effort to an amorphous “weak local revenue administration” which, in turn, is often attributed to a “lack of local political will.” Instead, weak local revenue performance is often caused by a combination of factors, including the fact that local governments are assigned unpopular taxes that are relatively costly to collect, and have weak enforcement powers and weak political incentives and/or the absence of hard budget constraints. [20]

As a result, most real-world interventions related to revenue assignment and local revenues are intended to ensure that subnational governments administer the limited revenue instruments assigned to them as efficiently as possible. Efforts to improve local property tax administration (particularly in urban areas), often play on outsized role in development partner interventions related to local government revenues (Kelly, White, and Anand 2020).

3.5 Political economy considerations: common obstacles in revenue assignments

Empowering intergovernmental (fiscal) systems: revenue assignments. Public sector revenues tend to be much less decentralized when compared to public sector expenditures. As noted in Section 2, when we apply the subsidiarity principle to the function of public taxation and revenue administration, most revenues are efficiently collected at the national level. An additional reason for this pattern is that political economy forces cause revenues to be highly centralized. Most Finance Ministers will be hesitant to give away high-yielding revenue instruments to subnational governments, and thereby reduce the ability of the national fiscus to ensure macro-fiscal stability.

Furthermore, it is common for central government politicians—ahead of their next election—to abolish local taxes that are unpopular with the electorate, allowing central politicians to cut taxes for voters without a negative impact on their own (central) budget. More often than not, these local revenue sources are reinstated after the election, when locally elected leaders appeal to the national party that local revenues are an important foundation for the financial survival of local governments.

Efficient, inclusive and responsive revenue assignment. In response to news that local governments are collecting only x percent of the revenue that they could be collecting (where x is a small number, sometimes even as small as 10 percent), it is not unusual for national-level politicians or policy researchers studying local revenue administration to condemn local government officials for lacking the political will to collect own source revenues.

Such criticism may or may not be warranted, and if nothing else, it does not necessarily point to a problem with local tax administration. It is useful to start by acknowledging the political economy argument that local revenue collections are not intended to be maximized, but rather, that local revenue collections are optimal where the marginal cost to local taxpayers of additional taxation equals the marginal benefits from additional public services. In an effectively decentralized system, if the chain of accountability is working, locally elected officials are the arbiters of the level of local taxation at which this optimum is achieved. The “lack of political will” may simply reflect a rational political response to a situation where it might be politically easier for a mayor to get additional resources as a special grant from central government compared to collecting from local constituents. Local leaders may also exhibit a lack of political will to collect own source revenues results if the efficiency or responsiveness of local government spending is relatively low. A low level of lack of political will is only a real concern if local politicians are setting effective tax rates – through a combination of formal tax rates and weak revenue administration and enforcement – that result in a level of local taxation that falls below what is considered optimal by local constituents.

A bigger concern may actually be when predatory local taxation, the opposite of inadequate revenue mobilization, occurs. [21] Another serious problem occurs when the local government administers local taxes and revenues in a patently inequitable manner for example, enforcing taxes on political opponents, but not on political supporters, or when pervasive inefficiency or corruption exists in local tax administration. It is not just local politicians who are to blame at the local level for weak local revenue administration. As long as local politicians and taxpayers are satisfied to remain at an equilibrium of low taxation and low service delivery performance, the tax administration apparatus does not face strong incentives to improve its collection performance. Perhaps unsurprisingly, then, most local revenue mobilization efforts focus on other local administration improvement efforts such as improving land administration and property valuation, while basic revenue collection activities, such as billing systems and enforcement and collection of arrears, are frequently overlooked.

Engaged civil society, citizens, and business community: revenue assignments. While the long term success of any public sector depends on its ability to generate revenues from which to fund public sector expenditure, it is equally important to consider the perspective of the (local) taxpayer in determining the assignment of revenue sources and the optimal level of taxation at different levels. In most countries, even under the best of circumstances, taxpayers are unlikely to pay their (local) taxes if payment can be avoided without negative consequences. Tax collection and enforcement issues aside, local taxpayers’ willingness to pay taxes in return for local public services is likely to be limited if the local government’s decision making is unresponsive, or if the local government’s capacity to efficiently deliver services is weak.

A final political economy consideration regarding local revenue collection is how the money gets spent. Wealthier taxpayers might be willing to pay local taxes if they perceive benefits from higher local taxes. However, the willingness of wealthy taxpayers to support pro-poor local services is often limited by the strength of local social contract. Thus, local revenue compliance may decline over time when local governments pursue redistributive policies beyond the level supported by those contributing most to the local treasury.

[12] According to the OECD definition used, tax revenue is not made up only of own-source taxes, but includes shared taxes as well. Even with this more expansive definition of subnational government tax revenues, subnational taxes account for only 14.9% of public tax revenues. As discussed further below, the main funding source for subnational governments (on average) is formed by intergovernmental fiscal transfers.

[13] In this sense, decentralized provision of locally-provided goods mimics market-provision of private goods, where consumers opt to consume a private good up to the point where the marginal benefit from the good equals the marginal cost. Basic economic analysis (for instance, in the context of a representative agent or median voter model) suggests that in addition to the local governments’ responsiveness to constituent preferences, other key determinants of the optimal level of local taxation include the relative price (i.e., efficiency or inefficiency) of local service provision and the presence or absence of general-purpose grants.

[14] An efficient assignment of revenue sources should prevent the possibility of “tax exporting”, by which a local or regional government is able to impose a tax burden on residents outside its jurisdiction. For this purpose, it is important to recognize that the burden of a tax may be borne by someone other than the person who pays the tax. For instance, while import duties are paid by the importer, the actual burden of the tax is typically borne by the final consumer (because the cost of the import duty raises the final sales price). As such, assigning the power to levy import duties to local governments (or the practice of charging an octroi on the trans-shipment of goods through a local jurisdiction) would effectively allow local government to tax the residents of other local governments without providing commensurate services to them.

[15] Tax competition between different subnational jurisdictions as well as duplicative taxation by different levels (resulting in cumulative high marginal tax rates) would have the potential for economic distortion and inefficiency.

[16] As noted in Section 3.3 below, economists consider that such shared revenues are in fact intergovernmental fiscal transfers. Nonetheless, it is not unusual for the domestic Chart of Accounts to register such shared revenues as own source revenues rather than as intergovernmental revenues in order to give the appearance of tax autonomy.

[17] Compared to other sectors, the health sector offers a positive example, as the World Health Organization’s accounting of Total Health Expenditures seeks to incorporate different funding flows, including public sources (government spending); private (out of pocket) spending; social health insurance; and donor organization spending. Despite the extensive guidance in the sector, however, it is often still difficult to entangle how much is being collected and spent of health services, and, by whom, at the subnational level.

[18] Boex and Vaillancourt (2014) point to the case of education spending in Madagascar. Primary education is formally a central government responsibility provided in a deconcentrated fashion following a classic French model. In 2010‐2011, centrally hired primary school teachers (either as permanent civil servants or contractual employees) accounted for only 32% of all public school teachers; of the remaining 68% (called FRAM teachers), 48% were hired and paid in part by parental committees and in part by a subsidy paid directly to teachers by the central government and 20% were hired/paid by parent’s committees, often with in kind payment (rice).

[19] The link between local taxes and local expenditures and accountability at the local level is called Wicksellian connection. See Bird and Slack (2013).

[20] National revenue authorities don’t necessarily do any better job when asked to collect local revenues (Fjeldstad, Ali, and Katera 2019).

[21] The definition of predatory taxation is often in the eye of the beholder. However, most people would be concerned about the efficiency and equity of local revenue assignments if a major share of local revenues would benefit tax collectors, or if these local revenues are mainly used to pay for the sitting allowance of local officials.

Copyright 2015-2024. Local Public Sector Alliance.

• DOI: 10.1007/978-3-030-21986-4_2
• Corpus ID: 203312583

Expenditure and Revenue Assignment: Principles

• H. Kitchen , M. McMillan , Anwar Shah
• Published in Local Public Finance and… 2019
• Economics, Political Science
• Local Public Finance and Economics

One Citation

Municipal tax restrictions and economic efficiency: an analysis of australian local councils.

• Highly Influenced

46 References

Taxing choices: issues in the assignment of taxes in federations, centralized versus decentralized provision of local public goods: a political economy analysis, the reform of intergovernmental fiscal relations in developing and emerging market economies, rethinking subnational taxes: a new look at tax assignment, a pure theory of local expenditures, fiscal decentralization and local finance in developing countries, fiscal federalism: index, decentralization, subjective well‐being, and the perception of institutions, intergovernmental fiscal relations: universal principles, local applications, fiscal decentralization and life satisfaction: evidence from urban china, related papers.

Showing 1 through 3 of 0 Related Papers

Expenditure and Revenue Assignment: Principles

• First Online: 06 September 2019

Cite this chapter

• Harry Kitchen 4 ,
• Melville McMillan 5 &
• Anwar Shah 6  

582 Accesses

1 Citations

This chapter provides a conceptual overview of the principles of expenditure and revenue assignment to local governments. Local government is seen to be more aware of local preferences and conditions and more accountable to local residents than senior governments. Core and noncore responsibilities are distinguished (e.g., local streets versus schooling). Financing follows function. Financing follows the benefit criterion; that is, local residents pay for the local services from which they benefit—with user charges and local taxes although grants may be needed. Various (especially) noncore services involve interjurisdictional spillovers and/or redistributive considerations and so, if assigned to local governments require intergovernmental transfers to achieve efficiency and equity objectives. Financing alternatives and appropriate uses are reviewed.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

• Available as PDF
• Read on any device
• Instant download
• Own it forever
• Available as EPUB and PDF
• Compact, lightweight edition
• Dispatched in 3 to 5 business days
• Free shipping worldwide - see info
• Durable hardcover edition

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

The vast number of references found in Bahl and Bird ( 2018 ) and Boadway and Shah ( 2009 ), two books providing comprehensive examinations of fiscal federalism and decentralization, illustrate the growth and extent of the literature. Earlier valuable contributions include those by Bahl and Linn ( 1992 ), Bird et al. ( 1995 ), Litvack et al. ( 1998 ), Manor ( 1999 ), McLure ( 1983 , 1999 ), OECD ( 1987 , 1997 , 1999 ), Owens and Norregaard ( 1991 ), Shah ( 1991 , 1994 ), and Ter-Minassian ( 1997 ).

A resulting additional argument for decentralization is that it enhances political participation. Greater responsiveness, accountability, and enhanced participation have long been seen as advantages of decentralization in the political literature. Other widely noted potential positive features of local government are greater transparency of government to local residents and, of course, greater autonomy. Shah ( 2014 ) advocates for movements toward FAIR (fair, accountable, incorruptible, and responsive) local governance and outlines a framework for evaluation. Blending these desirable characteristics with the economics of fiscal federalism has created a powerful case for decentralization and a more valuable tool for the analysis of decentralized government.

Besley and Coate ( 2003 ) have extended the theory underlying the conventional arguments for decentralization. Their more general model assumes cost sharing of centrally provided outputs under a nationally uniform tax system, allows for non-uniform central provision across localities, locally elected representation to the central government, cooperative and non-cooperative legislative decision-making, varying degrees of heterogeneity in local tastes, and varying interjurisdictional spillovers. Heterogeneity of tastes and the degree of spillovers are central to the centralization-decentralization choice with less heterogeneity and more spillover favoring centralization. However, the case for decentralization is surprisingly strong and prevails even when tastes are uniform and spillovers significant. Also see Ingram and Hong ( 2008 , 17–108).

Critical assessments of fiscal federalism and, particularly, decentralization have emerged—motivated in part by difficulties experienced within some countries. Oates ( 2005 ) characterized those as an emerging second-generation of fiscal federalism. He categorized the second-generation literature (notably in Oates 2008 ) as having two strands. The first strand applies a broader range of economic modeling (i.e., beyond the more conventional public finance) to the questions of fiscal federalism while the second strand evolved from public choice with a focus on political institutions. Both address problems with decentralization that have or might occur. A dominant concern is the problems that emerge with soft (rather than hard) budget constraints on decentralized governments. Essentially, the second-generation literature focuses on problems that can arise when there are flaws in the decentralization design. Surveys of the impacts of decentralization generate mixed results but do point to the importance of good design and implementation (e.g., see Bahl and Bird 2018 , Chapter 2). Also, there is some evidence that better-quality government enhances personal well-being (Helliwell and Huang 2008 ; Helliwell et al. 2018 ) and, though somewhat mixed and deserving of more detailed analysis, that decentralization can also increase well-being/life satisfaction (e.g., Bjornskov et al. 2008 ; Diaz-Serrano and Rodriguez-Pose 2012 ; Gao et al. 2014 ; Tomaney et al. 2011 ). Closely related is a literature on measuring the decentralization of government (e.g., Ivanyna and Shah 2014 ; Hooghe et al. 2010 , 2016 ; Hooghe and Marks 2016 ). The OECD provides valuable recent overviews of fiscal federalism and decentralization (e.g., OECD 2013 , 2016 , 2018 ).

It is important to recognize that borrowing is not a substitute for adequate funding. Debt must be repaid and debt-servicing costs met from the borrowing government’s revenues. Borrowing only facilitates financing long-term capital investments, particularly when they are large and irregular.

For example, see Wiesner ( 2003 ) for a discussion of the role of market-based decentralization in Latin America and Dollery and Wallis ( 2001 ) for a more general discussion of competition in the delivery of public services. Oates ( 1999 ) includes a discussion of market-preserving federalism.

See Tresch ( 2015 , Chapters 26 and 27) for a discussion of a redistributional role for local government.

For further discussion of the topics addressed in this section, see, for example, Dollery and Wallis ( 2001 , Ch 2), Fisher ( 1996 , Ch 6), and Oates ( 1972 ).

See a public finance text (e.g., Fisher 1996 ) for details of the ideal allocation of the cost of public goods. The basic idea is that each individual is charged a personal marginal cost equal to that person’s marginal benefit and the ideal level of output exists when, in the case of a pure public good, the sum of all individual marginal benefits equals the marginal cost of the output.

The problem of distinguishing between economics of sharing and economies of scale is that it is often difficult to distinguish between units of output when many individuals benefit from the same unit of output. For example, there could be economies of scale in the operation of an air pollution abatement system (e.g., cost per unit of particulate matter removed decline to some point) but the benefits of the improvement in air quality resulting from some additional abatement (change in output) could be enjoyed by many or few people (economies of sharing).

For insight into and a brief review of empirical economies of scale analyses, see Byrnes and Dollery ( 2002 ).

For discussion and empirical insights, see McMillan et al. ( 1981 ) and McMillan ( 1989 ).

For illustrations of the assignment of responsibilities among multi-tiered governments, see Table 4.1 of Chap. 4 and Shah ( 2006 , Chapter 1).

Even when services are purely local, citizens may prefer having an upper-level government to review certain activities (e.g., water quality, sewerage treatment, refuse disposal) to provide an informed and independent assessment of performance and especially of the less observable aspects.

See Dahlby ( 2001 ) for a “consensus view” of tax assignments. The shift of the payroll tax to the upper tier(s) of government has been prompted as well by its widespread utilization by senior governments to finance earmarked social benefit programs such as unemployment insurance and social security/pensions.

This treatment reflects the usual top-down perspective on tax assignment in that the matter is decided at the center. In some cases, however, tax assignment is a bottom-up decision where federating states decide upon what tax powers the new central authority should have. See Dahlby ( 2001 ).

In the interests of maintaining the advantages of an internal common market (i.e., free trade within the country) the only taxes, if any, on cross-border movements of goods and services should be national levies on foreign trade.

Bird ( 1999 ) argues that the international adoption of national value-added taxes and their revenue importance have contributed to this centralization.

A broader discussion of transfers—beyond the gap-closing role—appears in the latter part of this chapter.

Dahlby ( 2001 ) notes several problems with the “consensus” view. Those are (a) the need to link expenditure and tax decisions, (b) a need to consider expenditure assignment and grant systems, (c) neglect of distributional impacts of subnational government policies, (d) overlooking certain problems of joint occupancy of tax fields, (e) ignoring that some economic shocks calling for stabilization are region specific, and (f) putting little emphasis on administration and compliance costs of alternative tax assignment regimes.

It is important to remember that property taxes, and especially those taxing improvements as well as land, also may not match benefits exactly and, like a local personal income tax, involve some redistribution. On the other hand, a local personalincome tax may match better benefits and costs for a local service such as schooling.

Kitchen and Slack ( 1993 ) found that about 40 percent of municipal government (i.e., nonschooling) expenditure benefited nonresidential property.

Also see Bahl and Bird ( 2018 , pp. 208–211).

When prices for the services of local government enterprises are above the levels consistent with user charges (e.g., utility charges exceed full costs), the difference is effectively a special sales tax on those services.

For those reasons, Bird ( 1999 ) has recommended a more uniform local business value-added tax.

Besides the references cited below, the following provide valuable insights into intergovernmental transfers: Bird ( 2000 ), Bird and Smart ( 2002 ), Ebel and Yilmaz ( 2001 ), Martinez-Vazquez and Searle ( 2007 ), Shah ( 1999 , 2004 ), and Shah and Thompson ( 2004 ).

At the local government level, however, fiscal disadvantages may be offset in part through capitalization into property values.

Bird ( 1993 ) offers an additional rationale for conditional matching grants. Conditional matching funding can induce local governments to spend some of their own funds on the grantor’s priorities (e.g., achieving minimum standards or greater uniformity of local services) thus stretching the grantor’s budget. While a legitimate perspective, the basis for the mutual interest is in some shared or spillover benefits. Gramlich ( 1977 ) classifies conditional transfers aimed at such grantor policy objectives as also blending the advantages of centralized finance and decentralized supply as having a political-institutional justification. However, because those grants have an efficiency basis, they are distinguished here from the politically motivated grants below.

Bahl, Roy, and Richard M. Bird. 2018. Fiscal Decentralization and Local Finance in Developing Countries . Northampton, MA: Edward Elgar Publishing.

Book   Google Scholar  

Bahl, Roy W., and Johannes F. Linn. 1992. Urban Public Finance in Developing Countries . New York: Oxford University Press.

Google Scholar  

Besley, Timothy, and Stephen Coate. 2003. Centralized versus Decentralized Provision of Local Public Goods: A Political Economy Approach. Journal of Public Economics 87 (12): 2611–2637.

Article   Google Scholar  

Bird, Richard M. 1993. Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization. National Tax Journal 46 (2): 207–227.

———. 1999. Rethinking Subnational Taxes: A New Look at Tax Assignment . IMF Working Paper 165, International Monetary Fund, December.

———. 2000. Intergovernmental Fiscal Relations: Universal Principles, Local Applications . Working Paper 00-02, International Studies Program, School of Policy Studies, Georgia State University, April.

Bird, Richard M., and Michael Smart. 2002. Intergovernmental Fiscal Transfers: Some Lessons for International Experience. World Development 30 (6): 899–912.

Bird, Richard M., and Francois Vaillancourt, eds. 1998. Fiscal Decentralization in Developing Countries . Cambridge: Cambridge University Press.

Bird, Richard M., Robert D. Ebel, and Christine I. Wallich, eds. 1995. Decentralization of the Socialist State: Intergovernmental Finance in Transition Countries . Washington, DC: The World Bank.

Bjornskov, Christian, Axel Drehe, and Justina A.V. Fischer. 2008. On Decentralization and Life Satisfaction. Economics Letters 99 (1): 147–151.

Boadway, Robin, and Frank Flatters. 1982. Efficiency and Equalization Payments in a Federal System of Government: Synthesis and Extension of Recent Results. Canadian Journal of Economics 15 (4): 613–633.

Boadway, Robin, and Anwar Shah. 2009. Fiscal Federalism: Principles and Practice of Multiorder Governance . New York: Cambridge University Press.

Burki, Shahid Javed, Guillermo E. Perry, and William R. Dillinger. 1999. Beyond the Center: Decentralizing the State. In World Bank Latin American and Caribbean Studies . Washington, DC: The World Bank.

Byrnes, Joel, and Brian Dollery. 2002. Do Economies of Scale Exist in Australian Local Government? A Review of the Recent Evidence. Urban Policy and Research 20 (4): 391–414.

Council of Europe. 1985. European Charter of Local Self-Government . http://conventions.coe.int/treaty/en/Treaties/Html/122.htm .

Dahlby, Bev. 2001. Taxing Choices: Issues in the Assignment of Taxes in Federations . ISSJ 167/2001, UNESCO. Oxford: Blackwell Publishers.

Dethier, Jean-Jacques, ed. 2000. Governance, Decentralization and Reform in China, India and Russia . Dordrecht: Kluwer Academic Publishers.

Diaz-Serrano, Luis, and Andres Rodriquez-Pose. 2012. Decentralization, Subjective Well-Being, and the Perceptions of Institutions. Kyklos 65 (2): 179–193.

Dollery, Brian E., and Joe L. Wallis. 2001. The Political Economy of Local Government . Cheltenham: Edward Elgar.

Ebel, Robert D., and Serdar Yilmaz. 2001. Concept of Fiscal Decentralization and Worldwide Overview . Paper presented at the Symposium of the Quebec Commission on Fiscal Imbalance, Quebec City, Quebec, September 13–14.

Fisher, Ronald C. 1996. State and Local Public Finance . Chicago, IL: Richard D. Irwin.

Gao, Song, Xiangyi Meng, and Li Zhang. 2014. Fiscal Decentralization and Life Satisfaction: Evidence from Urban China. Social Indicators Research 119 (3): 1177–1194.

Gramlich, Edward M. 1977. Intergovernmental Grants: A Review of the Empirical Literature. In The Political Economy of Fiscal Federalism , ed. W.E. Oates, 219–239. Lexington, MA: Lexington Books.

Helliwell, John F., and Haifang Huang. 2008. How’s Your Government? International Evidence Linking Good Government and Well-Being. British Journal of Political Science 38 (4): 595–619.

Helliwell, John F., Haifang Huang, Shawn Grover, and Shun Wang. 2018. Empirical Linkages Between Good Governance and National Well-Being. Journal of Comparative Economics 46 (4): 1332–1346.

Hooghe, Liesbet, and Gary Marks. 2016. Community, Scale, and Regional Governance: A Postfunctionalist Theory of Governance . Vol. II. Oxford: Oxford University Press.

Hooghe, Liesbet, Gary Marks, and Arjan H. Schakel. 2010. The Rise of Regional Authority . New York: Routledge.

Hooghe, Liesbet, Gary Marks, Arjan H. Schakel, Sandra Chapman Osterkatz, Sara Niedzwiecki, and Sarah Shair-Rosenfield. 2016. Measuring Regional Authority: A Postfunctionalist Theory of Governance . Vol. I. Oxford: Oxford University Press.

Ingram, Gregory K., and Yu-Hung Hong. 2008. Fiscal Decentralization and Land Policies . Cambridge, MA: Lincoln Institute of Land Policy.

Ivanyna, Maksym, and Anwar Shah. 2014. How Close Is Your Government to Its People? Worldwide Indicators on Localization and Decentralization. Economics 8: 1–61. https://doi.org/10.5018/economics-ejournal.ja.2014-3 .

King, David. 1984. Fiscal Tiers: The Economics of Multi-level Government . London: George, Allen and Unwin.

Kitchen, Harry M., and Enid Slack. 1993. Business Property Taxation . Discussion Paper 93-24, Government and Competitiveness Series, Queen’s University, Kingston, ON.

Litvack, Jennie, Junaid Ahmad, and Richard Bird. 1998. Rethinking Decentralization in Developing Countries , PREM Sector Studies Series. Washington, DC: World Bank.

Manor, James. 1999. The Political Economy of Democratic Decentralization . Washington, DC: The World Bank.

Martinez-Vazquez, Jorge, and Bob Searle, eds. 2007. Fiscal Equalization: Challenges in the Design of Intergovernmental Transfers . New York: Springer.

McLure, Charles E., ed. 1983. Tax Assignments in Federal Countries . Canberra: Australian National University Press.

———. 1999. The Assignment Problem: Conceptual and Administrative Considerations in Achieving Subnational Fiscal Autonomy . Washington, DC: The World Bank.

McMillan, Melville L. 1976. Criteria for Jurisdictional Design: Issues in Defining the Scope and Structure of River Basin Authorities and Other Public Decision Making Bodies. Journal of Environmental Economics and Management 3 (1): 46–68.

———. 1989. On Measuring Congestion of Local Public Goods. Journal of Urban Economics 26 (2): 131–137.

McMillan, Melville L., W.R. Wilson, and L.M. Arthur. 1981. The Publicness of Local Public Goods: Evidence from Ontario Municipalities. Canadian Journal of Economics 14 (4): 596–608.

Musgrave, Richard A. 1959. The Theory of Public Finance . New York: McGraw-Hill.

———. 1983. Who Should Tax, Where and What? In Tax Assignments in Federal Countries , ed. C.E. McLure, 2–19. Canberra: Australian National University Press.

Oates, Wallace E. 1972. Fiscal Federalism . New York: Harcourt, Brace Jovanovich.

———. 1993. Fiscal Decentralization and Economic Development. National Tax Journal 46 (2, June): 237–243.

———. 1999. An Essay on Fiscal Federalism. Journal of Economic Literature 27 (3): 1120–1149.

———. 2005. Towards a Second-Generation Theory of Fiscal Federalism. International Tax and Public Finance 12 (4, August): 349–373.

———. 2008. The Evolution of Fiscal Federalism: Theory and Institutions. National Tax Journal 61 (2, June): 313–334.

OECD (Organization for Economic Co-operation and Development). 1987. Managing and Financing Urban Services Growth . Paris: OECD.

———. 1997. Managing Across Levels of Government . Paris: PUMA.

———. 1999. Taxing Powers of State and Local Government . OECD Tax Policy Studies, No. 1, Paris.

———. 2013. Fiscal Federalism 2014: Making Decentralization Work . Paris: OECD Publishing.

———. 2016. Fiscal Federalism 2016: Making Decentralization Work . Paris: OECD Publishing.

———. 2018. Assigning Responsibilities Across Levels of Government . OECD Working Papers on Fiscal Federalism, September. https://www.oecd-ilibrary.org/docserver/f0944eae-en.pdf?expires=1551479356&id=id&accname=guest&checksum=3046DD4B5D67CBCB4DCBCDC89D5ECC8D .

Owens, Jeffrey, and John Norregaard. 1991. The Role of Lower Levels of Government: The Experience of Selected OECD Countries. In Local Government: An International Perspective , ed. Jeffrey Owens and Giorgio Panella, 3–54. Amsterdam: North-Holland.

Rondinelli, Dennis. 1999. What is Decentralization. In Decentralization Briefing Notes , ed. J. Litvack and J. Seddon, 2–5. Washington, DC: World Bank Institute.

Shah, Anwar. 1991. The New Federalism in Brazil . The World Bank Discussion Paper #124, Washington, DC.

———. 1994. The Reform of Intergovernmental Fiscal Relations in Developing and Emerging Market Economies, Policy and Research Series, 23 . Washington, DC: The World Bank.

———. 1999. Intergovernmental Transfers and Grants. In Decentralization Briefing Notes , ed. J. Litvack and J. Seddon, 27–31. Washington, DC: World Bank Institute.

———. 2004. Fiscal Decentralization in Developing and Transition Economies: Progress, Problems and the Promise . World Bank Policy Research Working Paper 3282, The World Bank, Washington DC, April.

———. 2006. A Comparative Institutional Framework for Responsive, Responsible and Accountable Local Governance. In Local Governance in Industrialized Countries , ed. Anwar Shah, 1–40. Washington, DC: The World Bank.

Chapter   Google Scholar  

———. 2014. Responsibility with Accountability: A FAIR governance framework for performance accountability of local governments. Zbornik Radova Ekonomskog Fakulteta u Rijeci 32 (2): 343–377.

Shah, Anwar, and Theresa Thompson. 2004. Implementing Decentralized Local Governance: A Treacherous Road with Potholes, Detours and Road Closures . World Bank Policy Research Paper 3353, The World Bank, Washington DC, June.

Stigler, George. 1957. Tenable Range of Functions of Local Government. In Federal Expenditure Policy for Economic Growth and Stability , ed. Joint Economic Committee, Subcommittee on Fiscal Policy, 213–219. Washington, DC.

Ter-Minassian, Teresa, ed. 1997. Fiscal Federalism in Theory and Practice . Washington, DC: International Monetary Fund.

Tiebout, Charles. 1956. A Pure Theory of Public Expenditures. Journal of Political Economy 64 (5): 416–424.

Tomaney, J., A. Pike, G. Torrisi, V. Tselios, and A. Rodríguez-Pose. 2011. Decentralisation Outcomes: A Review of Evidence and Analysis of International Data . Department for Communities and Local Government. https://blogs.ncl.ac.uk/curds/files/2013/02/DecentralisationReport.pdf .

Tresch, Richard W. 2015. Public Finance: A Normative Theory . 3rd ed. Waltham, MA: Academic Press.

Walsh, Cliff. 1992. Fiscal Federalism: An Overview of Issues and a Discussion of Their Relevance to the European Community . Canberra: Federalism Research Centre Discussion Paper No. 2, The Australian National University.

Wiesner, Eduardo. 2003. Fiscal Federalism in Latin America: From Entitlements to Markets . New York: Inter-American Development Bank.

World Bank. 1994. World Development Report, 1994: Infrastructure for Development . Washington, DC: The World Bank and Oxford University Press.

Download references

Author information

Authors and affiliations.

Department of Economics, Trent University, Peterborough, ON, Canada

Harry Kitchen

University of Alberta, Edmonton, AB, Canada

Melville McMillan

Governance Studies, Brookings Institution, Washington, DC, USA

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Harry Kitchen .

Rights and permissions

Reprints and permissions

Copyright information

© 2019 The Author(s)

About this chapter

Kitchen, H., McMillan, M., Shah, A. (2019). Expenditure and Revenue Assignment: Principles. In: Local Public Finance and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-21986-4_2

Download citation

DOI : https://doi.org/10.1007/978-3-030-21986-4_2

Published : 06 September 2019

Publisher Name : Palgrave Macmillan, Cham

Print ISBN : 978-3-030-21985-7

Online ISBN : 978-3-030-21986-4

eBook Packages : Economics and Finance Economics and Finance (R0)

Share this chapter

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Publish with us

Policies and ethics

• Find a journal
• Track your research

• Previous Chapter
• Next Chapter

A key issue in the literature on fiscal federalism is the question of how subnational authorities might best be financed. This complex issue has no easy solutions, given the wide variety of systems actually applied in different countries and at different times in specific countries. Although there is no ideal system of financing state or regional and local governments, because every country faces different problems and different perspectives, some basic objectives may provide broad guidelines on how tax assignment can best be carried out. Tax assignment can hardly be looked at in isolation. It is an issue intimately related to the question of expenditure assignments across different levels of government, which was discussed in detail in Chapter 2. Even a carefully designed system of intergovernmental expenditure allocation will not work satisfactorily unless it is supported by an equally well-thought-out financing system, and vice versa.

A key issue in the literature on fiscal federalism is the question of how subnational authorities might best be financed. This complex issue has no easy solutions, given the wide variety of systems actually applied in different countries and at different times in specific countries. Although there is no ideal system of financing state or regional and local governments, because every country faces different problems and different perspectives, some basic objectives may provide broad guidelines on how tax assignment can best be carried out. Tax assignment can hardly be looked at in isolation. It is an issue intimately related to the question of expenditure assignments across different levels of government, which was discussed in detail in Chapter 2 . Even a carefully designed system of intergovernmental expenditure allocation will not work satisfactorily unless it is supported by an equally well-thought-out financing system, and vice versa.

This chapter focuses on the questions to be addressed when decisions are being made on tax assignment among different levels of government. The term “tax assignment” here describes the level of government responsible for determining the level and rate structure of various taxes, whether their revenue is to be collected or received by that level, or shared with others.

• Tax Assignment and Tax Sharing

The general principles of decentralization must guide the assignment of taxes to different levels of government. According to these principles, as laid out in the traditional local finance literature, regional and local governments should ideally fulfill mainly allocational functions by providing services that accrue primarily to the local population, services whose costs the local constituency bears as far as possible. In the same vein, because of the degree of openness of local economies, the literature on fiscal federalism argues in favor of limiting regional and local government roles in economic stabilization, as well as in distributional policies.

In very broad terms, the assignment of funds to local jurisdictions may in principle follow one of three options. The first, and probably least attractive, option assigns all tax bases to local jurisdictions and then requires them to transfer upward part of the revenue to allow the national government to meet its spending responsibilities. As this option may hinder effective income redistribution across the national territory, as well as the effectiveness of fiscal stabilization, it may not represent the most efficient way of raising public resources and may provide inadequate incentives for the local jurisdictions to participate in the financing of the national economy. This system resembles that previously in force in the former Yugoslavia and is somewhat similar to the system of negotiated tax-sharing previously practiced in Russia. The system previously in force in China, generally recognized to have inhibited the government’s ability to pursue stabilization policies, had analogous features to this extreme model.

A second option, on the other extreme, is to assign all taxing powers to the center, and then finance subcentral governments by grants or other transfers, either by sharing total revenue or by sharing specific taxes. The main disadvantage of this option is that it completely breaks the nexus between the level of tax revenue collected and the decisions to spend that revenue, which constitute the basic prerequisite for a multilevel governmental system that enhances efficiency. Without this connection, the risk is that fiscal illusion will lead to overprovision of local government services. Also, because of the risk of frequent, discretionary cuts in transfers to local levels of governments, this system could also make it difficult to establish a stable system of service provision at the local level. This kind of system bears some resemblance to that once applied in the former Soviet Union and in Hungary. Substantial grant financing of local governments is still practiced in a number of industrial countries, such as France, Italy, and the Netherlands.

The third broad option is the more normal one of assigning some taxing power to the local jurisdictions, if necessary (that is, if vertical imbalances persist) complementing the revenue raised locally with tax-sharing arrangements or other transfers from the central government. This option leads directly to the question of which taxes should be assigned to local jurisdictions and which taxes should remain the responsibility of the national government (the tax assignment problem). By assigning taxes and thus letting the local jurisdictions bear the tax burden at the margin associated with expenditure decisions, the budgetary actions of local governments will be guided by tax-benefit considerations and will in this way improve economic efficiency. 1

The tax assignment problem is typically not an either/or problem with a specific tax placed clearly and solely under the responsibility of either the local, the state, or the central government: rather, in reality (for most taxes) a spectrum of different designs exists ranging from full and complete local autonomy to systems with some local discretion and to others with no local autonomy whatsoever. In other words, even if a specific tax, such as an income tax, has been assigned to the local level because it is found to satisfy the criteria for a “good local tax” (see below), it is possible to design the income tax with varying levels of local revenue autonomy. Table 1 illustrates this important point in a very general way by providing a ranking of different tax designs with respect to the degree of autonomy that they leave with the local governments. For the sake of illustration, the table also includes the main nontax sources of revenues for local governments, although obviously a ranking of this nature can only be broadly indicative.

Fiscal Autonomy in Subcentral Governments

Complete local fiscal autonomy over revenues requires in principle that local governments can change tax rates and set the tax bases. In many countries, however, the central government either defines local tax bases or sets relatively narrow limits to the capacity of local governments to influence the tax base. In some countries (for example, Norway), the central government also sets out limits to the possible variation of local government tax rates.

Taxes assigned to lower levels of government may take the form of own taxes (sometimes referred to as tax separation systems), defined as taxes accruing solely to lower levels of governments, which can determine the rate and, in some cases, also have some autonomy to influence the tax base. An alternative system is represented by overlapping taxes (sometimes called piggybacking systems of local taxation) with the same (or almost the same) tax base for the different levels of government, but with the right of each level of government to set its own tax rate on that common base. This is the system of personal income taxes applied in, for example, the Nordic countries. In Canada, the income tax system used by the provinces involves levying the tax as a percentage of the federal tax revenue accruing within each province. As opposed to tax separation systems, a system of overlapping taxes may involve administrative advantages with regard to assessing the base and to tax collection. This, however, may be at a potential cost of reduced transparency as the tax levied at each level of government may be less easily identifiable for the taxpayers.

Some, in particular federal, countries prescribe in their constitution the system of tax assignment to be applied. Thus, in India, the Constitution prevents overlapping tax powers so that one type of tax can be levied by only one level of government. Likewise, the modalities of local government taxing powers are specified in the Constitutions of Nigeria and Brazil. In Switzerland, the federal government is prohibited by law from imposing indirect taxes, whereas in Australia a similar rule applies for the states.

The question of local fiscal autonomy may be considered almost completely independent from the question of who actually administers and collects the tax. The allocation of these tasks should be determined on the basis of where they can be carried out most efficiently, although one consideration may be that local accountability may be encouraged if the tax is assessed and collected locally.

Probably the single most critical issue in the discussion of subcentral fiscal autonomy, when looked at from the tax side, is whether the authorities concerned can determine their own tax rates. It could be argued that the case for local discretion, as far as the tax base is concerned, should be limited, because changing tax base definitions (for example, by allowing local governments to set individually the amount of a basic allowance, to introduce special tax reliefs, or to exempt specific sources of income or groups of taxpayers) could lead to distortions in the allocation of resources across localities, and also could have important redistributional consequences—an area in which local autonomy is generally believed to be unwarranted. If local governments cannot alter their tax rates, they cannot alter the level of their services in accordance with local preferences. In some countries, subcentral authorities rely mainly on taxes whose rates are fixed by the central government (for example, the countries with extensive tax-sharing arrangements, such as Portugal and Germany) or whose rate is subject to a ceiling. (Norway is a special case in this regard in that all local governments apply the ceiling rate of the local income tax.)

The importance attached to a lack of discretion in local tax policy depends mainly on the role subcentral authorities are supposed to play. To the extent that they are seen mainly as agents, implementing the policies laid down by other tiers of government, their limited autonomy with respect to tax policy would not appear to be serious. In contrast, if they are meant to implement their own expenditure programs and independently set their service levels in accordance with local preferences, their inability to determine tax rates and thus the level of their own revenues is a serious problem owing to the potential conflict between expectations, needs, and wishes of the local population, and the actual revenue potential available to local governments.

The main arguments against providing subcentral authorities with extensive fiscal autonomy center on the risk of increasing economic disparities between areas or localities and alleged restraints on central government macroeconomic control. Administrative simplicity or administrative economies of scale are also used as arguments for centralized taxes with a specific proportion of tax revenues being allocated to subordinate levels of government.

In what follows, the more specific aspects of tax assignment are dealt with by addressing the basic question of which taxes can be considered good candidates for state and local tax sources and which cannot. What characterizes a good local tax?

A Good Local Tax

A good local tax adequately supports a decentralized public expenditure system. The literature on fiscal federalism and local government finance 2 generally suggests that the following criteria and considerations should form the basis for decisions on which taxes can adequately be assigned to the subcentral level and which should remain at the national level.

To the extent that the tax in question is aimed at, and is suitable for, economic stabilization or income redistribution objectives, it should be left to the responsibility of the central government.

The base for taxes assigned to the local level should not be very mobile, otherwise taxpayers will relocate from high to low tax areas, and the freedom of local authorities to vary rates will be constrained. For this reason, general consumption taxes are found at subordinate levels of government only where geographical areas are very large (for example, Canada and the United States). Thus, the more mobile a tax base, the greater the presumption to keep it at the national level.

Tax bases that are very unevenly distributed among jurisdictions should be left to the central government.

Local taxes should be visible, in the sense that it should be clear to local taxpayers what the tax liability is, thereby encouraging local government accountability.

It should not be possible to “export” the tax to nonresidents, thereby weakening the link between payment of the tax and services received.

Local taxes should be able to raise sufficient revenue to avoid large vertical fiscal imbalances. The yield should ideally be buoyant over time and should not be subject to large fluctuations.

Taxes assigned to the local level should be fairly easy to administer or, in other words, the more important economies of scale in tax administration are for a given tax, the stronger the argument for leaving the tax base for that tax to the national level. Economies of scale may depend on data requirements, such as a national taxpayer identification number and computerization.

Taxes and user charges based on the benefit principle can be adequately used at all levels of governments, but are particularly suitable for assignment to the local level, inasmuch as the benefits are “internalized” to the local taxpayers.

This set of broad criteria translates into more specific recommendations regarding which taxes should be assigned to different levels of government, that is, which taxes may be considered good local taxes and which should be left in the domain of the central government. It is generally acknowledged in the literature 3 that the most obvious candidates as good local taxes are land or property taxes and, to some extent, personal income taxes. With some exceptions, turnover or consumption taxes, as well as taxes on capital income, in particular corporate income taxes, are generally considered less appropriate at the local level and in some cases also at the state level 4 because of the mobility of the corresponding tax bases. This broad conclusion derived from principles of local finance seems in very general terms to conform to the financing system actually found in most countries.

The following discussion addresses these questions on a tax-by-tax basis and is intended to cover all the main taxes to which tax assignment is applied in practice (disregarding whether these taxes according to the general principles are considered appropriate at subordinate levels of government or not). The treatment of the different taxes is also intended to be in descending order of importance for subordinate level of governments, although this ordering must necessarily be somewhat subjective (see Tables 2 and 3 ). 5

Distribution of Tax Revenue Among Different Levels of Government

1 Includes supernational authorities’ share of general government total tax revenue for Belgium (1.5 percent), France (0.7 percent), Germany (0.9 percent), the Netherlands (1.4 percent), and the United Kingdom (1.2 percent).

2 Data for general government do not include local government.

Distribution of Different Taxes Within Different Levels of Government

(In percent)

2 There are no state governments in unitary countries.

3 No data on local governments are available.

• Property Taxes

Property taxes, including in particular land taxes, have historically been widely used as subcentral taxes without any special regard to their alleged incidence. This is the outcome of the perceived advantages of the property tax as a local tax. With a property tax it is always clear which authority is entitled to the revenue it yields, which is not always so for income taxes and other taxes. Administration costs are generally found to be lower for a property tax (provided that there is a registry of properties with updated values) than for an income tax, which requires complex tax returns. The yield of a property tax can be predicted more accurately than for an income tax or a profits tax. Finally, some of the tax will be levied on businesses, which seems reasonable to the extent that businesses derive benefits from subcentral services, such as roads and other infrastructure services.

An additional argument for the use of property taxes is that, while almost all residents pay directly or indirectly (through rents) the property tax, thus avoiding free-rider problems in local service provision, this is not always the case for local income taxes. It has also been argued that property taxes are guided by the benefit principle of taxation to the extent that the corresponding spending by local governments benefits local properties by increasing their value. Against this view, it could be held that, although land and existing structures and thus the tax base cannot move in a physical sense, the tax base can do so in a fiscal sense via the capitalization of property taxes to the extent that property taxes are not used for purposes viewed as beneficial to property owners.

The main disadvantage of property taxes lies in the fact that they almost universally realize lower amounts than needed. There are many reasons for this, including the fact that it is a very visible tax (and thus politically unpopular), that it is perceived to have unwanted distributional consequences to the extent that the tax is borne by renters and not by owners of property, and that there are problems associated with the measurement of the tax base, including in particular the “correct” valuation of property, and its updating.

Some countries prefer to distinguish between residential property and commercial and industrial property, with the former being assigned to local taxation, and the latter either to local taxation with a uniform rate or to national taxation only (as is the case in some Nordic countries). In this regard, a particularly contentious issue in many countries (whether industrial, developing, or in transition) has been the taxation of agricultural land. In countries with a general income tax (including income from agriculture), a tax on land could be seen as a discriminatory surcharge on a basic factor input in one sector of the economy, rather than a local benefit tax. In countries without an income tax on agriculture, it has been argued that a land tax on agriculture impedes the development of this important foreign exchange earning sector. Whatever the merits of these arguments may be, the relatively modest tax burden on agriculture found in most countries (which is generally independent of the level of development of the countries in question) seems to reflect the political influence of this sector rather than economic principles or sound fiscal policies.

Other countries apply alternative criteria for the assignment of property taxes to different levels of government. In Brazil, for example, urban property is taxed at the municipal level, while the federal government levies and administers the tax on rural property.

More specifically, at least four important issues relate to the definition and measurement of the base upon which property taxes are levied: the coverage of the base, the use of capital or rental values, the number and nature of exemptions, and the frequency and methods of updating property values. The main issue regarding coverage has been whether land, improvements to land, and buildings should all be subject to tax. The systems applied vary substantially between countries, although most of the countries for which information is available include the unimproved value of land, the value of land improvements, and usually also the value of buildings. The efficiency and equity implications of property taxes have been intensively debated in the literature and will not be pursued further here (see McLure (1977) for an overview of the issues).

In principle, the impact of using rental values or capital values should be the same, assuming well-functioning property and capital markets. It has been argued, however, that there may be major differences in the actual outcome to the extent that rental values reflect mainly the current use of the property, while capital values are said to reflect the value of the property in the best alternative use. Also in this regard, actual methods vary between countries. Capital values are generally based upon market values, although some countries apply corrections to these market values (for example, use a specific proportion of the market value).

Most countries apply a large number of different reliefs under the property tax, for example, in the form of exemption of government property, highways, railways, and other transport or communication facilities, and mining, agriculture, and forestry industries. The subsidies implicit in this kind of treatment, not least with respect to agricultural land, have been increasingly criticized in a number of countries. As indicated above, many countries apply different tax treatment to residential and business property, with residential property usually subject to a more favorable treatment.

A particularly contentious problem in a number of countries has been the frequency and method used to update property values. Thus, in most developing countries, assessment of property values and updating seem to be the major issues. The unpopularity of this type of tax may in some countries be associated with infrequent updates of values, leading to large and abrupt increases in tax liabilities when updating actually takes place. Although property valuations are generally based on market prices, problems are also encountered during certain periods and in areas with modest turnover of property. State and central governments usually perform the valuation of property in order to achieve the necessary coordination between different areas, but the way in which and frequency with which it is done vary substantially across countries.

Although most of the revenue from property taxes generally accrues to subcentral levels of government, state or local governments do not always have complete discretion over the base or the rate. Central governments typically set the rules governing valuations and their frequency and determine exemptions and other reliefs. Also, the central government may impose restrictions on the variations in property tax rates. In practice, local government discretion may be limited in other ways, for example, in the form of earmarking of property revenues, or if higher rates adversely affect grants (as in the United Kingdom before 1989). In Italy, the central government sets a minimum rate for the property tax. If a municipality does not apply the floor rate, transfers to it from the central government are supposed to be reduced correspondingly. Thus, although most of the revenue from property taxes primarily accrues to subcentral authorities in most countries, the respective central governments are generally heavily involved in formulating and administering the provisions of the taxes.

• Personal Income Taxes

Most countries assign all or a large proportion of personal income taxes to the central government. Exceptions include the Scandinavian countries, Switzerland, the Baltic countries, Russia, and the other countries of the former Soviet Union. Generally, there are advantages as well as disadvantages of using personal income taxes at the subcentral level. Among the advantages is the fact that personal income taxes generally are buoyant and thus capable of raising the necessary revenue, and in addition they are believed not to fall on businesses, thereby avoiding the risk of subcentral authorities, anxious to attract new industry, indulging in tax-cutting competitions with adverse effects on services provided.

One of the main disadvantages of a local income tax as the main revenue raiser is the fact that, depending on the level of the tax threshold, many people may not pay the tax, although they receive local services. 6 This could have an adverse impact on the way a decentralized system works and has been used as an argument for supplementing an income tax with other tax sources, thereby including the majority of the local constituency in the local tax net. In this regard, two schools of thought may be distinguished. First, many countries (including, for example, most Mediterranean countries and Austria) seem to place considerable weight on income redistribution and on making income tax systems easy to administer by setting a high tax threshold, thereby excluding a large proportion of the population from the tax net. In contrast, other countries (such as New Zealand, Switzerland, and the Scandinavian countries) generally put more emphasis on the inclusion of most of the population in the tax net by setting relatively low tax thresholds, so that more people share the cost of public services.

In the context of financing local governments, there seems to be a case for making a distinction between schedular and global income taxes, since schedular income taxes can in some cases be used by local jurisdictions without great difficulties, in particular if the taxes on, for example, interest income, dividend income, and wages and salaries are withheld at source and constitute the final tax paid. However, the more developed is a country, the higher is the likelihood that individuals receive income from different sources, and furthermore that these incomes are derived from different jurisdictions. This may move countries to prefer a global income tax system in which the different income sources are added together for each individual and the tax liability is adjusted according to individual circumstances. 7 For such a system to work well at the local level, it requires flows of information on personal income received from other jurisdictions and thus poses the risk of tax evasion. Against this background, it may be better to leave a global income tax base with the national government, which is in a better position to acquire the necessary information.

However, such a system can be combined with revenue sharing, such as is the case in India, where the states receive about 85 percent of total income tax revenue, allocated on the basis of population, tax effort, and a measure of backwardness. In Brazil, 44 percent of the income tax revenue is transferred to lower level governments under a tax-sharing arrangement, and in Poland, in 1992, 15 percent of the personal income tax revenue was shared with local governments. As part of a recent reform of intergovernmental fiscal relations, shared personal income taxes have also been introduced in Hungary (in 1991, 50 percent of the revenue accrued to local governments). Similar tax-sharing arrangements were also important elements in the financing reform in China in 1980 (under the present financing arrangements, local governments receive all of the yields from personal income taxes).

Notwithstanding these considerations, and to the extent that the administrative capabilities are present at the national level, there is a fairly easy and cost-effective way of taxing a global income tax base in local jurisdictions, namely for the local jurisdictions to use the same statutory tax base as for the national income tax (that is, overlapping taxes or piggybacking). This solution, which reduces administrative as well as compliance cost, is actually used in a number of countries (such as, for example, the Nordic countries and Canada, where the provincial tax is levied as a percentage of the federal tax). 8 However, although it introduces an additional complexity to the tax and thus offsets at least in part some of the administrative savings, some of the countries applying this system (for example, the United States) also use specific tax reliefs in their state and local tax systems. Thus, the extent to which countries using overlapping income taxes coordinate the taxes levied at different levels varies considerably. In the Scandinavian countries and Canada, for example, there is a high degree of coordination, while coordination is lacking in Switzerland and the United States.

Generally, because the system requires a fairly advanced administrative system with up-to-date recording of taxpayers’ residence, overlapping personal income taxes are generally seen only in developed countries. Combined with an efficient equalization system, such a system is seen, in the countries that apply it, to ensure that variations in tax rates across jurisdictions reflect similar differences in locally determined service levels. Even in industrial countries, however, the administrative recording requirements have been used as an argument against the workability of local income taxes (which, for example, is the case in the United Kingdom).

A special case of overlapping personal income taxes (or partly overlapping income taxes, if some differences in tax bases are allowed) arises when local income taxes, as in the United States, are deductible from federal income tax liability (deductibility is not applied in the majority of countries using overlapping personal income tax systems). The rationale of such a system is the protection it provides for the taxpayer against excessive aggregate marginal tax rates as a result of high local income taxes. An unwarranted side effect may, however, be the incentive for local governments to expand their expenditures, partly financed—at the margin—by nonresidents. It may also reduce the overall level of progressivity of the tax system.

Taxes on income deriving from the activities of small business establishments or from agriculture may often be imposed as efficiently by local governments as national governments, and in some cases local governments may even possess more information than national governments. However, since record keeping by small establishments is often modest or even absent, taxation of such business income has in many cases to rely on presumptive income, based for example on gross sales, on the floor space in which the activity takes place, or on other criteria (for example, in Hungary, the local business tax is levied on the gross turnover of businesses at a maximum rate of 0.3 percent). Taxes on income from small businesses, from self-employed, and from agriculture, with the revenues accruing mostly or solely to local governments, are well known in a number of Central and Eastern European economies in transition, including Poland and Romania, as well as in a number of developing countries, such as India.

Notwithstanding which level of government actually receives the revenue of personal income taxes, practice differs substantially across countries with regard to which level is responsible for the assessment and for the collection of the income taxes at the subordinate level. National or central government responsibility, or—at the most—state responsibility, seems, however, to be the main rule owing principally to the economies of scale involved in the administration of these taxes.

• Sales Taxes

The popularity of assigning property taxes—and to some degree also income taxes—to subordinate levels of government is attributable in part to the fact that, with these taxes, differences in tax rates between areas are unlikely to cause serious problems owing to the relative immobility of the tax bases. In contrast, different sales tax rates between different jurisdictions can drive consumers (or rather their purchases) away from high tax areas, as is perhaps best reflected in the serious cross-border trade problems between countries with different tax systems and tax levels (such as between Canada and the United States, and between Ireland and the United Kingdom). A distinction must be made, however, between single-stage sales taxes, such as excises and retail taxes, and multistage sales taxes, such as turnover taxes and value-added taxes (VATs).

Retail sales taxes and excises levied on the final sale to the consumer can be given to local jurisdictions as a revenue source, provided that they do not levy these taxes with highly different tax rates. If they do, citizens will be encouraged to shop in other jurisdictions. The main factors determining the extent to which this will take place are the vicinity of other jurisdictions, the cost of travel, and the value of the goods purchased. 9 Another constraining factor for the use of such taxes at the local level with anything but a modest level of tax rates is the risk of tax evasion, which may be relatively more serious for these (single-stage) sales taxes, especially under high tax rates. However, the existence of, for example, both state and municipal sales taxes in many countries must reflect the fact that these caveats are not universally perceived as serious. Thus, in India, the main revenue source of the states is the sales tax. Turnover taxes and some excises are also important provincial revenue sources in Argentina.

A case can be made for distinguishing between excises on goods, which generally should be assigned to the central level to minimize tax exporting, and excises on selected services, consumed locally, and thus much less prone to tax exporting. Some countries, such as India, assign selected excises to the central government (combined with a tax-sharing scheme), and other excises to state and local governments. A number of countries use local excises or special taxes on automobiles or on fuels, which could be regarded as benefit taxes associated with the costs to local governments of maintaining roads. Municipalities in Brazil are allowed to levy a 3 percent tax on retail sales of fuels and gas. In Poland, own sources of revenue for local governments include a tax on automobiles.

Some countries combine earmarking sales taxes with tax assignment to different levels of government. In Russia, for example, a system of regional and federal road funds is in place, financed in part by excises on fuel and on vehicles, supplemented by taxes on registration and ownership of vehicles.

Sales taxes levied at the manufacturing level should, as a general rule, be assigned to the upper tier of government and to subordinate levels of government only where geographical areas are large.

There seems to be broad albeit not universal consensus in the literature that VATs are most appropriately assigned to the central level of government. This dictum rests on the fairly extensive administrative capabilities required to operate the tax (a requirement that is generally best met by central governments) in combination with the need to make the VAT neutral with respect to the spatial allocation of production and consumption, implying that—generally—the VAT should conform to the destination principle. 10 Implementation of this principle requires, however, border control between jurisdictions if the tax is to be levied by individual provinces or states. This would in most countries be neither feasible nor desirable because of the administrative costs implied and because of the impediments to the free flow of goods and services it would create. In addition, a subnational VAT system would pose problems with regard to which provinces or states should receive the revenues from VAT on imports, and which should bear the burden of VAT refunds on exports. 11 Following this kind of reasoning, comprehensive VATs should be left solely with the national government, as is, in fact, the case in most countries. In some countries (for example, China, Germany, and Russia), central VAT revenues may be shared with subnational levels, although this raises the same kind of problems referred to above, if the tax sharing is based on the derivation principle.

Similar considerations on different aspects of VAT design constitute important elements in the ongoing tax reform discussion in India, which contemplates introducing a comprehensive VAT to replace existing excises and sales taxes, with the aim of sharing the revenue between the three levels of government. However, one of the main questions is whether such a system could function properly without fundamental changes in the present system of intergovernmental fiscal relations in India. According to Bird (1993) , it could prove difficult to establish consensus on a formula distributing the VAT proceeds in a context of sharp regional inequalities as the one currently prevailing in that country. Bird also questions the rationale behind sharing the proceeds of any particular tax, because it would seem doubtful that the central government would go through the pain of increasing tax revenues that will accrue in large part to other governments. A more satisfactory alternative—according to Bird—would be to share with the states a fixed share of aggregate central tax revenues.

Brazil offers an example of a VAT assignment system that is generally believed to have had detrimental effects on economic performance. All three levels of government in Brazil are assigned taxing powers on consumption, but with different tax systems, and with the tax covering the widest base, the VAT-type ICMS assigned to state governments and not to the federal government. Furthermore, a large fraction of the federal government consumption tax (the IPI) is transferred to lower levels of governments under a tax-sharing arrangement. This particular design is believed to encourage tax competition between entities of government and to foster tax evasion, which is, furthermore, exacerbated by a large number of different tax rates and exemptions (see Chapter 18 for details).

• Corporate Profit Taxes

There seems to be almost universal agreement that the taxation of larger businesses, and in particular corporate profit taxes, should be left to the national level and to provinces or states only where these are very large (as in Canada). This reflects the fact that the economic activities of corporations are typically much more diversified and complex, with factor inputs originating from a number of jurisdictions (and possibly also from abroad), and with sales similarly going to a multitude of jurisdictions. Depending on the nature of the specific markets in question, local taxes on corporate profits would to a large degree be exported or shifted to other jurisdictions in a nontransparent way, thus rendering the associated tax burden almost imperceptible to local citizens. In addition, a high local-tax rate may lead the business entity in question to move the tax base to other jurisdictions, either by physically moving the corporation or by adjusting the internal transfer pricing arrangements.

Leaving the taxation of corporate profits entirely in the hands of local governments would thus create serious informational problems because of the administrative issues associated with the allocation of taxable profits between different jurisdictions in cases of enterprises with economic activity spread over many localities. But also in this case these problems could, at least in part, be overcome by some form of overlapping tax bases between the national and the local level (piggybacking), although the room for tax-rate variations is much smaller for the corporate profits tax than for personal income taxes. In Canada, the base is harmonized to a considerable degree between the provinces and the federal level (although provinces do have the possibility of providing individual investment incentives), while provinces have the flexibility to vary rates. In Brazil, the states can levy a 5 percent surcharge on the corporate income tax.

Some countries have, with the above-mentioned problems in mind, chosen instead to allocate a fixed portion of the profit tax revenue originating within each jurisdiction to the local governments under a tax-sharing arrangement. Thus, Russia allocates 25 percentage points of the 38 percent tax rate on corporate profits to regional governments, while the remaining 13 percentage points remain with the federation. 12 Of the corporate tax revenue in Poland in 1992, 5 percent was shared with local governments. In Nigeria, a special system is in force according to which the federal authority has the legal jurisdiction over the company tax, but the states nevertheless collect the tax and retain the proceeds.

• Payroll Taxes

Like VATs and corporate profit taxes, different types of payroll taxes are also generally seen as an appropriate revenue source for the central government only, because different payroll tax rates could drive employers, and jobs, away from high tax areas. In addition, tax exporting is probably significant in the sense that, first, part of the tax may be shifted to prices and thus borne by consumers outside the jurisdiction that receives the revenue, and, second, the tax may be levied on employees with residence outside the revenue-receiving jurisdiction. Thus, the tax may not be visible to the local taxpaying constituency, and the relationship may be weak between tax payments and services provided by jurisdictions. 13

Notwithstanding these general considerations, tax-sharing arrangements for payroll taxes actually exist in a few countries. A relatively small payroll tax is also levied by the states in Australia.

• Natural Resource Taxes

Taxes on natural resources are generally perceived as poor candidates for local taxation, since normally the base of these taxes is very unevenly distributed across jurisdictions. In addition, extraction of economic rent from natural resources could be held to be a national prerogative, which should benefit the whole of the nation and not just selected fortunate regions. The taxes in question are also in many cases characterized by a high level of revenue volatility owing to price fluctuations. The associated uncertainty, it could be argued, should be absorbed by the central government, which generally has a number of alternative revenue sources at its disposition, and not by regional or local governments, which are meant primarily to conduct allocative functions (price fluctuations on oil, for example, have created sharp swings in the revenues of states in Nigeria). These theoretical considerations, however, do not take into account the important fact that, in practice, cultural and ethnic differences may be the reason for strong pressures toward regional independence, including regional control over natural resources, as is seen, for example, in Russia.

Alternatively, it could be held that, at least in part, these taxes should be considered as benefit taxes, that is, as payments for the benefits deriving from the provision by local or regional governments of the necessary infrastructure investment without which either exploitation of the natural resources would not be possible, or the return to the investments required could be significantly reduced. In other cases, the taxes may be considered as compensation for the environmental costs associated with the exploitation of natural resources. This might also constitute part of the reason why a number of countries actually operate tax-sharing schemes for natural resource taxation (see country chapters for details). In Russia, local governments in regions rich in natural resources benefit from the retention of a high share of these taxes. Previously, in Nigeria, all taxes accruing from oil production went to the states. In Argentina, a revenue-sharing scheme is in place for royalties on mineral extraction.

• Import and Export Taxes

Import and export taxes, apart from being generally considered inferior to the taxes dealt with above, should always be imposed by the national government to reduce the possibility of introducing major distortions within the country through differential foreign trade taxes imposed by different jurisdictions. In fact, the large majority of countries assign import duties exclusively to the central government (Nigeria being one exception, with import tax revenue being shared). Nevertheless, in some countries, such as Russia, the formula for sharing important export tax receipts with regions from which the exports originate remains an important tax policy issue (because of the nature of the exports in question, these taxes may as well be considered special cases of taxes on natural resources). India operates a special tax on interstate sales with a maximum rate of 4 percent, and with a number of exemptions (see Chapter 21 for details).

• Benefit Taxes and User Charges

In addition to what has been said above about specific sources of taxation, it is generally held that benefit taxes, license fees, and user charges should all be used to the maximum extent feasible at the local level because they are transparent, they minimize the risk of tax exporting, they generally do not involve problems of vertical or horizontal equity, and they increase economic efficiency. Although these charges are significant sources of revenue for the localities, they are generally modest compared with some of the taxes considered above.

• Tax Assignment in Practice

A striking feature of the financing of subcentral levels of government is the significant variation in the level and composition of local government taxation across countries. This feature is illustrated in Tables 2 and 3 , which for a fairly limited sample of countries show the attribution of total tax revenues to subsectors of general government as percentage of total tax revenue, in federal as well as in unitary countries, and the composition of the tax revenue for each subcentral level of government with respect to different types of taxes (including revenues from the tax-sharing arrangements). These tables by their nature do not indicate the actual degree of state, provincial, or local autonomy over the tax revenues, which, as discussed this chapter, may vary considerably across countries.

Nevertheless, as the tables show, most countries have more than one subcentral tax (although the tables do not distinguish between cases where revenues are solely assigned to the subcentral level and where they are shared under tax-sharing arrangements), and this holds for industrial as well as for developing countries, and for federal as well as for unitary countries. Generally, the personal income tax seems (as expected) to be of greater importance for the subcentral level in industrial countries than in developing countries, although for example in most Anglophone countries the property tax is the dominant tax, especially at the local level (this holds in Australia, Canada, the United States, Ireland, New Zealand, and, until 1990, the United Kingdom).

In some, especially federal, countries, general consumption taxes and in some cases also excises play a considerable role, particularly at the state level (for example, in Austria, Brazil Canada, Germany, India, South Africa, Spain, and the United States). A predominant feature seems to be that these taxes are used by large countries with correspondingly large subcentral areas. Also, in some of these countries, consumption tax systems take the form of tax-sharing arrangements with little or no state or local discretion, as in the case of the Austrian and German VAT.

A common feature not shown in these tables is the dominant use of personal income taxes at the subcentral level as opposed to corporate income taxes, reflecting the fact that corporate income taxes are generally considered unsuitable at the subcentral level owing to the mobility of the tax base.

Although the property tax is among the most popular subcentral taxes, not least in federal industrial countries and unitary developing countries, its revenue measured as a percentage of GDP is generally modest and seldom exceeds about 3 percent. This is probably because it is a highly visible tax, it is hard to evade, there are problems associated with the valuation of property, and it is generally perceived as a regressive tax. For these reasons, the property tax has become increasingly unpopular politically, which may also help to explain why its importance as a revenue source has declined in many countries during the last decade or so.

• Concluding Remarks

The theory on fiscal federalism provides some fairly broad guidelines with regard to which taxes can appropriately be assigned to subnational levels of government and which should be kept at the central level. However, although some general patterns in accordance with these guidelines can be identified in country practices, even fairly homogeneous countries at the same level of development have in many cases chosen different solutions to these problems. One of the main reasons for this is that the historical, geographical, ethnic, and constitutional character of each country has profound implications for the range of feasible and efficient tax assignment policies.

Some lessons may nevertheless be drawn from actual country experiences. First is the importance of tax administration: a decentralized fiscal system cannot function satisfactorily without the necessary administrative capabilities at the subcentral level. In other words, the design of tax systems should clearly be adapted to the level and quality of administrative resources that have been found politically appropriate to devote to the subcentral levels of government. Generally, the more complicated the tax in question is made for other reasons (for example, for reasons of revenue or equity), the stronger the argument for placing the tax with a higher or the highest tier of government. As a reflection of this “rule,” more complex systems of taxation are generally assigned to subcentral levels of governments only in more developed countries.

Second, in addition to the crucial question of the choice of tax sources at subordinate levels of government, actual experience indicates that a decentralized system will work satisfactorily only if state, provincial, and local governments are given at least one major own source of revenue, that is, a source of revenue over which they have autonomy to determine the revenue (assuming that this system is supported by adequate equalization of tax capacities and expenditure needs). Only then can a multilevel system of government promote accountability and ultimately economic efficiency.

Finally, there are obvious potential gains as well as risks associated with decentralizing taxing powers. The gains include improved mobilization of revenue sources and the potential efficiency gains alluded to above. The risks take the form of leaving the central government in a more vulnerable position with respect to its ability to conduct effective fiscal policies, especially for stabilization purposes.

This assumes chat there are no substantial externalities associated with the provision of local services, that the tax cannot be shifted to other jurisdictions, and that an efficient equalization scheme is in place.

For general expositions of the principles of fiscal federalism, see Oates (1972) and King (1984) .

See in particular King (1984) , Musgrave and Musgrave (1980) , and Oates (1972) .

Unless the areas in question are large as is the case in, for example, Canada and the United States.

As illustrated in Tables 2 and 3 , the importance of different tax sources varies considerably across countries. Based on more comprehensive information than that presented here, there seems to be a broad tendency for income taxes at subordinate levels of government to increase in importance with increasing level of development, although there are some exceptions to this rule.

In some countries, such as Finland and Norway, the income tax threshold in the local tax is much lower than in the central government income tax.

However, schedular mechanisms such as withholding or minimum contributions may be widely used under a global system for ease of administration.

This particular feature may increase the revenue elasticity of the subcentral tax compared with a normal flat rate system to the extent that subcentral governments will share the gains of any bracket creep effects in the federal tax.

This disregards the problems posed by mail order systems, particularly with regard to the control and setting of tax rates (in the United States, some of these problems have been addressed by applying the rates of the destination states to mail order sales). Although based on a fairly limited sample of countries, Table 3 seems to indicate that the degree of development is also important in this regard, in that there is a tendency for sales taxes to be of larger revenue importance for local governments in developing than in developed countries.

Which means that the tax is levied by the jurisdiction in which consumption takes place, independent of the origin of the goods (that is, expotts are exempt and imports are liable to tax), as opposed to the origin principle, according to which the VAT is levied by the jurisdiction in which production takes place, that is, interstate exports are taxed and imports are not.

In China and Russia, ail import VAT accrues to the federal government, and only domestic VAT revenues are shared with the regions.

Formally, the 25 percent local rate is a maximum, but the large majority of regions are believed to apply the maximum rate.

In the majority of countries, provision of regional or local government services is related to the residency of individuals.

Bird , Richard M. , 1993 , “Tax Reform in India,” Economic and Political Weekly , Vol. 28 ( December 11 ), pp. 2721 – 26 .

• Search Google Scholar
• Export Citation

King , David N. , 1984 , Fiscal Tiers: The Economics of Multi-Level Government ( London : Allen & Unwin ).

King , David N. , 1992 , ed. , Local Government Economics in Theory and Practice ( London : Routledge ).

McLure , Charles E. , Jr. , 1977 , “The ‘New View’ of the Property Tax: A Caveat,” National Tax Journal , Vol. 30 , No. 1 , pp. 69 – 75 .

Musgrave , Robert A. , and Peggy B. Musgrave , 1980 , Public Finance in Theory and Practice ( New York : McGraw-Hill ).

Oates , Wallace E. , 1972 , Fiscal Federalism ( New York : Harcourt Brace Jovanovich ).

Tanzi , Vito , 1996 , “Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects,” in Annual World Bank Conference on Development Economics, 1995 ( Washington : World Bank ).

Within Same Series

• 4 Tax Reform in Russia
• PART I Theory
• 6 Recent Tax Policy Trends and Issues in Latin America
• VII: Tax Reform and IMF Tax Policy Advice
• Chapter 2. Modernizing the Tax Policy Regime
• PART III Practice: Developing Countries
• PART IV Practice: Economies in Transition
• Chapter 3. Strengthening Tax Administration
• IV: Income and Wealth Taxes
• PART II Practice: Industrial Countries

Other IMF Content

• Revenue Assignments—Tax Policy and Administration
• 11 Basic Issues of Decentralization and Tax Assignment
• Rethinking Subnational Taxes: A New Look At Tax Assignment
• 5 Tax Administration
• 8 The Assignment of Oil Tax Revenue
• 12 Local Taxation in an International Perspective
• Tax Policy Options for a United Germany
• Technical Assistanceon Tax Policy: A Review
• How to Design Tax Policy in Fragile States

Other Publishers Content

Asian development bank.

• A Comparative Analysis of Tax Administration in Asia and the Pacific: Sixth Edition
• A Comprehensive Assessment of Tax Capacity in Southeast Asia
• Taxation and Social Protection
• Reforming the Personal Income Tax System in the People's Republic of China
• A Comparative Analysis of Tax Administration in Asia and the Pacific
• Tax Expenditure Estimation Tool Kit
• The Governance Brief Issue 30, 2017-Localizing Global Agendas in Multilevel Governance Systems: The Benefi ts of Functional Assignment as Core Element of Decentralization Reforms
• Asian Development Outlook (ADO) 2022: Mobilizing Taxes for Development
• Mapping Property Tax Reform in Southeast Asia
• Excise Tax Policy and Cigarette Use in High-Burden Asian Countries

Inter-American Development Bank

• Switching from Payroll Taxes to Corporate Income Taxes
• The Impact of the Business Cycle on Elasticities of Tax Revenue in Latin America
• The Harmonization of Indirect Taxes in the Andean Community
• Quo Vadis Income Tax?: Towards the PIT-CA
• Economic Integration and the Transformation of the Tax Mix: Cyprus 1990-2001
• Brazil's ICMS Tax: Origin, Changes, Current Situation, and Paths to Recovery
• Trade Liberalization and Trade Taxes
• Party System Institutionalization and Reliance on Personal Income Tax in Developing Countries
• A Basic Framework for Evaluating Value Added Tax Expenditures

The World Bank

• Determinants of Property Tax Revenue: Lessons from Empirical Analysis
• Exploring Reform Options in Functional Assignment
• Ghana Tax Gap Analysis
• The Entry of Randomized Assignment into the Social Sciences
• A Handbook for Tax Simplification
• Not(ch) Your Average Tax System: Corporate Taxation under Weak Enforcement
• Academic Peer Effects with Different Group Assignment Policies: Residential Tracking versus Random Assignment
• Guinea - Opportunities for Enhanced Domestic Revenue Mobilization: Value-Added Tax and Excise Taxes
• Informality, Consumption Taxes and Redistribution
• Property Tax Diagnostic Manual
• Share on facebook Share on linkedin Share on twitter

Table of Contents

International Monetary Fund Copyright © 2010-2021. All Rights Reserved.

• [185.39.149.46]
• 185.39.149.46

Character limit 500 /500

Introduction to Fiscal Federalism and Division of Revenues under the Ethiopian Constitution

As a subfield of public economics, fiscal federalism is concerned with "understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government". In other words, it is the study of how competencies (expenditure side) and fiscal instruments (revenue side) are allocated across different (vertical) layers of the administration.

It may be noted that the ideas of fiscal federalism are relevant for all kinds of government, unitary, federal and confederal. The concept of fiscal federalism is not to be associated with fiscal decentralization in officially declared federations only; it is applicable even to non-federal states (having no formal federal constitutional arrangement) in the sense that they encompass different levels of government which have de-facto decision making authority. This however does not mean that all forms of governments are 'fiscally' federal; it only means that 'fiscal federalism' is a set of principles that can be applied to all countries attempting 'fiscal decentralization'. In fact, fiscal federalism is a general normative framework for assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions. The questions arise: (a) How federal and non-federal countries are different with respect to 'fiscal federalism' or 'fiscal decentralization' and (b): How fiscal federalism and fiscal decentralization are related (similar or different)? While fiscal federalism constitutes a set of guiding principles, a guiding concept that helps in designing financial relations between the national and sub-national levels of the government, fiscal decentralization on the other hand is a process of applying such principles. Federal and non-federal countries differ in the manner in which such principles are applied. Application differs because unitary and federal governments differ in their political & legislative context and thus provide different opportunities for fiscal decentralization.

An original definition of fiscal federalism states that "fiscal federalism" concerns the division of public sector functions and finances among different tiers of government. In undertaking this division, Economics emphasizes the need to focus on the necessity for improving the performance of the public sector and the provision of their services by ensuring a proper alignment of responsibilities and fiscal instruments. While economic analysis, as encapsulated in the theory of fiscal federalism, seeks to guide this division by focusing on efficiency and welfare maximization in determining optimal jurisdictional authority, it needs to be recognized that the construction of optimal jurisdictional authority in practice goes beyond purely economic considerations. Political considerations, as well as historical events and exigencies, have in practice, played major roles in shaping the inter-governmental fiscal relations in most federations. 

Even in non-federal states, there has been a growing movement towards greater fiscal decentralization in recent years. Some analysts have attributed this to globalization and deepening democratization the world over on the one hand and increasing incomes on the other. Other specific reasons for increasing demand for decentralization are:

• Central governments increasingly are finding that it is impossible for them to meet all of the competing needs of their various constituencies, and are attempting to build local capacity by delegating responsibilities downward to their regional governments.

• Central governments are looking to local and regional governments to assist them on national economic development strategies.

• Regional and local political leaders are demanding more autonomy and want the taxation powers that go along with their expenditure responsibility.

Moreover, in recent years, decentralization has become a feature of reform agenda promoted and supported by the World Bank (as stated in the World Bank Report of 1997) and other multilateral institutions. The rationale for this has been in part that decentralization promotes accountability. It is not therefore surprising that by 1997, 62 of 75 developing nations had embarked on one form of decentralization or another.

Fiscal federalism in Ethiopia has been adopted within a unique political landscape of ethnic federalism. The TPLF-led government that replaced the Dergue has redrawn the political map of the country and adopted ethnic based federal structure of government. This experiment has been formalized in the 1994 Constitution. However, the constitutional provisions operate with political centralism that has remained to be the distinguishing feature of the current political system.

Fiscal federalism derives its nature and characteristics from constitutional provisions as well as the state of economic development, the pattern of income and resource distribution, and the institutional capacity of the system. The constitutional provisions define the framework within which decision-making would be exercised and establishes the vertical and horizontal structures that find meaning within the prevailing socio-economic environment of the system. The vertical structure defines the assignment of fiscal decision-making power between the federal and lower tiers of government. The horizontal structure outlines the nature of interaction across cross-sections of government levels. This aspect addresses how regional governments interact to each other especially when there are externalities and spillovers. The main economic rationale behind fiscal decentralization is improving efficiency of public resource utilization, creating enabling environment for private sector development and the growth of the national economy. The theory of fiscal federalism addresses three issues related to fiscal decision-making: assignment of responsibilities and functions between the federal government and the regional governments, the assignment of taxation power and the design of inter-governmental transfer (subsidy) of fiscal resources coupled with provisions about the borrowing windows to sub-national governments. These factors give rise to a third issue of the relative size of the public sector in the national economy. It is therefore the dynamics of these processes and public policy choices that ultimately shapes the performance of the fiscal sector and its impact on the national economy.

An important aspect of the exercise of fiscal federalism is the assignment of fiscal functions to the federal and the sub-national governments and the appropriate means of financing these responsibilities. The theory of fiscal federalism does not provide a clear-cut separation of fiscal responsibilities that would promote economic efficiency and resource distribution. The broad thrust of normative theory is that expenditure responsibilities in areas of macroeconomic stabilization and redistribution functions should remain within the domain of the federal government whereas allocation functions should be assigned to lower levels of government. The argument is based on the reasoning that lower levels of government have limited capacity and policy instruments to provide stabilization and redistribution functions. Due to the nature of the responsibilities, the federal government usually assumes macroeconomic stabilization and income redistribution functions and make sure that regional governments would not take measures that are not compatible with such functions. Moreover, there are functions such as national defense and foreign affairs that have national public good character and hence usually assigned to the central government.

Fiscal decentralization and the assignment of functions can generate economic efficiency of the public sector. If preferences are heterogeneous across jurisdictions, which is most likely the case, decentralized decision-making power as to the provision of local public goods and services improves efficiency by tailoring services to the preferences of the local population. The main argument is that local governments are closer to the local population and can identify their choice and preferences better than the central government. Accordingly, when the decision to provide a bundle of public goods is made by local officials and these officials are directly accountable to the local voters, there is an incentive for the local public officials to provide services that reflect the preferences of the local population. Moreover, as long as there is close relation between the benefits from public services and taxes on the local taxpayers, there is additional incentive to utilize resources efficiently and cost effectively. At least by implication, the theory recognizes the need for local authorities to exercise choice in the provision of public services that are of higher local demand instead of resorting to the unitary solution. The decentralization theorem suggests that, under such conditions, decentralization of fiscal decision-making can improve efficiency of the public sector and the welfare of the local population.

Once the allocation of expenditure responsibilities is conducted according to such broad principles, the fiscal system needs to address the issue of assigning taxing power that broadly identifies who should tax, where and what. The imposition of taxes, in the absence of lump-sum source of taxation, always involves a certain degree of economic inefficiency. In the context of fiscal federalism, the assignment process needs to identify the comparative efficiency and effectiveness of providing the fiscal instruments to the multi-tier decision-making centers so as to finance public functions and activities in the most efficient manner possible.

What kind of taxes should be assigned to the federal government and which should be assigned to the local governments? The theory and practice in the assignment of taxation power identifies the following main criteria in assignment process: taxes on mobile tax bases, redistributive taxes, taxes that could easily be exported to other jurisdictions, taxes on unevenly distributed tax bases, taxes that have large cyclical fluctuations, and taxes that involve considerable economies of scale in tax administration should be assigned to the national or federal government. There are efficiency and equity considerations behind such principle of tax assignment.

The assignment of taxing power between the federal and the regional governments and the provision for concurrent power to share establishes the basic link in which the behavior of one of the parties would influence the decision making power of the other and its effective tax base. There is a possibility for vertical tax externality that might require additional policy instruments to correct their effect on other levels of government. When there are clear cases in which vertical tax externalities are prevalent, the tension between the federal and the state governments would arise. This in turn would require mechanisms for the assignment of taxing power and revenue based on the nature and characteristics of the tax base.

The assignment of taxing power is a thorny issue in fiscal policy and its application is influenced by a number of considerations. First, despite the legislative assignment of taxes, the actual potency of the tax network depends on the nature and development of the national economy, the relative distribution of economic activities across jurisdictions, and the administrative efficiency of the taxation system. Second, the practice of fiscal federalism, especially when citizens across regions with diverse economic and demographic situations are treated unequally, gives rise to the violation of one of the core principles of horizontal fiscal equity. Moreover, fiscal decentralization might also potentially breach the principle of vertical fiscal equity by not treating taxpayers with different capacity to pay differently. Third, despite the monopoly of taxing power resides at the disposal of the government, the reach of the taxation network depends on the economic circumstances of the potential taxpayers.

The fiscal system of Ethiopia has historically been characterized by high centralization and concentration of fiscal decision-making power at the center. Moreover, the structure of the fiscal system shares important features with other underdeveloped economies in terms of reliance on indirect taxes, dependency on international trade taxes, and persistent fiscal deficits. The current fiscal system of Ethiopia features some departures from the previous systems and striking continuities in the structure and essential elements of fiscal performance of the economy. The main features of fiscal aggregates of Ethiopia suggest that either the government is not willing to fundamentally change its fiscal policy stance or the fiscal system is governed by the structural features of the economy that are not easily amenable to change in response to fiscal policy reforms. A closer examination of the main features of the fiscal system suggests that both factors play a role in the process. The nature and structure of the economy, the resulting tax bases, the excessive dependence on international trade taxes and external grants, and persistent deficits all contribute to the prevailing features of the fiscal sector as do the fiscal policy stance of the government.

For the period 1980/81-2001/02, the government on average extracted about 18 percent of GDP from the public and spent about 28 percent of GDP, of which recurrent spending took more than 19 percent and only 9 percent left for capital spending. This behavior of excessive spending left an average fiscal gap of about 10 percent. Foreigners provided about 3 percent as charity and lent about 4 percent of GDP and the rest was financed mainly from domestic banking system. A fiscal system that resorts to borrowing to cover about 36 percent of its spending appetite would sooner or later confront the consequence of its behavior. It is an important predictor of a looming crisis. This behavior of fiscal spending also affected the macroeconomic situation in which aggregate expenditure run in excess of domestic production. The country has become increasingly dependent on foreign aid and borrowing to finance its consumption and investment expenditure.

The fiscal system, nonetheless, witnessed important changes over time. Government revenue increased during the 1980s and reached a peak of 24.8 percent of GDP in 1988/89 before it declined drastically during the subsequent two years of political turmoil in the country. The fiscal regime was extremely coercive and led to distortions in resource allocation. The prohibitively high marginal tax rate had driven most activities underground and tax evasion and corruption were on the rise. Such a system was indeed unsustainable and the change in the political regime precipitates a collapse in the fiscal system. The decline in revenue was particularly severe from business profit taxes, export taxes and revenue from government investment income. The collection of government revenue collapsed from about a quarter of GDP to about 10.6 percent by 1991/92.

The transitional government introduced a number of fiscal and monetary policy reforms that had mixed implications on the revenue collection. The amendment in the tax codes, devaluation and gradual depreciation of the exchange rate, elimination of taxes on exports (except coffee duties), and the privatization process have had important implications on the amount and structure of government revenue. The average domestic revenue to GDP ratio has recovered gradually and for the period 1991/92 to 2001/02 the average reached about 17.2 percent with a gradual and yet increasing trend. The average tax revenue for the period was about 11.7 percent of GDP.

One typical feature of the tax structure is its narrow base. There is an increasing dependency on foreign trade, especially import, taxes in recent years. The devaluation of the currency and its subsequent depreciation over time somewhat expanded the domestic currency denominated tax base on imports. The tax revenue-to-GDP ratio for developing countries is about 18 percent and for African countries is about 20 percent. The ratio of tax revenue in GDP for advanced countries is significantly higher than developing countries, at about 38 percent, reflecting the state of economic development, the tax base and the efficiency of tax administration. This pattern could broadly be attributable to the structure and performance of the economy, the administration of the taxation system, and the design of the taxation system.

A longer view of the fiscal resource allocation behavior of the government, despite marginal changes in some aspects of the fiscal components, suggests that there has not been enduring and significant shift in policy over the past two or so decades. The current government in power, except some marginal changes, shares important characteristics and behavior in fiscal policy with its predecessor. The current regime spends about 26 percent of GDP and extracts from the public about 17 percent of GDP.

Foreigners still provide about 3 percent as grants and lend about 3.7 percent of GDP. The remainder of about 2.4 percent of GDP has been financed from domestic borrowing. The relative performance of the current fiscal regime shows some improvement and yet it still covers about 23 percent of its spending by borrowing. The result of such features of government revenue and expenditure has been the emergence of persistent fiscal deficits and the accumulation of public debt. Domestic government revenue apparently has been barely enough to cover recurrent government expenditure let alone to generate resources for financing capital expenditure. The level of deficit has increased so much so that in recent years it has been as much as the total tax revenue collection of the government. Such a stance of fiscal policy is unsustainable and the external grants, even if important to partially narrow the gap, would not and could not resolve the problem. The government has increased its appetite for borrowing from foreign sources to bridge the gap and when external borrowing does not satisfy it resorts quite easily to borrow from the domestic banking sector.

The fiscal performance of the country is reflections of a typical underdeveloped and agrarian based economy in which the majority of the population lives in chronic poverty and a government that devotes its effort to extraction of resources from the economy and failing to allocate these resources to priority areas and sectors of the economy. When this is coupled with a de facto fiscal centralization and stance of inefficient public resource allocation, it fails to address the priorities of the majority of the population and hence becomes increasingly unsustainable. However, both political imperatives and changes in the overall economic policy of the country opened the door for fiscal policy innovation.

As far as the current system of fiscal federalisms and division of revenues in Ethiopia goes, the FDRE Constitution provides that the Federal Government and the States all collect taxes and shall share revenue, taking the federal arrangement into account. By taking into consideration principles such as ownership of revenue, regional character of revenues sources, convenience for administration, population, and wealth distribution, sharing of revenue between the Federal Government and the State Governments serves the following purposes: enhancing the efficiency of the central and the regional governments so as to enable them to carry out their respective duties and responsibilities; helping the regional governments to develop their regions on their own initiatives; narrowing the existing gap in development and economic growth between the regions of the country; and encouraging common interest activities of the regions.

In sharing of revenues, taxes are grouped into three: central (that of the Federal Government), regional and joint. As far as collection of the revenues goes, the regional governments collect their own revenues whereas the Federal Government collects not only its own revenues but also the joint revenues, of course with a possibility of delegation whenever deemed necessary.

According to Article 96 of the FDRE Constitution the revenues of the Federal Government include customs duties, taxes and other charges levied on the importation and exportation of goods; income tax collected from employees of the Federal Government and international organizations; income, profit, sales and excise taxes collected from Federal Government owned enterprises; taxes collected from national lotteries and other games of chance; taxes collected from income generated through air, rail, and sea transport services; taxes collected from rent of houses and Federal Government owned properties; charges and fees on licenses issued and services rendered by the Federal Government; taxes on monopolies; and Federal stamp duties.

In a similar manner, Article 97 enumerates the revenue sources of the regional governments of the country as comprising of income taxes collected from employees of the States and of private enterprises; fees collected from land usufructuary rights; taxes collected from the income of private farmers and farmers incorporated in cooperative associations; profit and sales taxes collected from individual traders operating within state territories; taxes on income from water transportation within state territories; taxes collected from rent of houses and State Government owned properties; profit, sales, excise and income taxes collected from State owned enterprises; taxes on income, royalties, and land rentals from mining operations; charges and fees on licenses issued and services rendered by the State Governments; and royalties for use of forest resources.

Apart from these, there are certain revenue sources which are shared by the Federal and State governments. The joint revenues are listed in Article 98 of the FDRE Constitution as constituting profit, sales, excise and income taxes on enterprises jointly established by the Federal and State governments; profits of companies and dividends of shareholders; and income and royalties derived from large-scale mining operations and all petroleum and gas operations. For those powers of taxation which have not been explicitly stated in the provisions of the FDRE Constitution, such as value added tax, Article 99 clearly stipulates that the exercise of such powers is to be determined by a two-third majority vote in a joint session conducted by the House of Federation and the House of People’s Representatives, thus subjecting the exercise of this so-called “undesignated power” to strict requirements.

The exercise of the taxing powers of both the Federal and Regional governments has to take certain considerations into account. For one, both governments are required to ensure that any tax is related to the source of the revenue taxed and that it was determined per the proper procedures. Secondly, both governments are required to ensure that the relationship amongst themselves is not adversely affected by the tax and that the rate and amount of taxes are commensurate with the services that the taxes help deliver. Finally, both governments are prohibited from levying and collecting taxes on each other’s properties unless it is a profit-making enterprise.

The FDRE Constitution gives much power to the regional states. Collectively, the regional states are granted the status of a nation. They are given self-determination up to secession. Self-determination is broadly understood to mean as the use and development of one's language, culture, history and administrative structure. Beyond the "unrestricted right to administer itself", self-determination also includes proportional representation at federal organs. In order to resolve conflicting claims over representation, territory and resource, the constitution has created the House of Federation whose members are elected by State Councils. The ethnic groups are represented at this institute. This House is composed of "representatives of nations, nationalities and people" at least one for each of them, plus an additional member for nation or nationality for each one million of its population". Ethnical conflicts and boarder disputes are referred to the House of Federation. This body has the role of supreme interpretation of the constitution and resolving key question of the nationalities/ethnic groups.

The regional states have their respective autonomous governments set up. Accordingly, each regional government includes a State Council (the highest organ of state authority) and a State Administration (highest organ of executive power). The State Council is the highest political authority: it defines the region's policy and has all legislative, executive and judiciary powers regarding the region, except for those under the responsibility of the central government, such as defense, foreign affairs, economic policy etc. The State Council plans, approves, heads and controls economic and social development programs. It drafts, approves and manages the regional budget. The State Administration is the highest executive authority of regional government. It is elected by the State Council and includes 15 Executive Committee members. The State Administration enforces, as appropriate, the policies, proclamations, regulations, plans, guidelines and decisions of the central government and of the State Council. It manages, coordinates and supervises the activities of regional offices, zone administration offices and Weredas (district) offices. It drafts and submits economic and social projects to the State Council for approval, and manages the projects once they have been approved. It drafts the region's budget, submits it for approval to the State Council and manages the budget once approved.

At the broadest level, the general principle underlying the allocation of authority and legislative responsibility in federal systems has been that matters of common interest and concern to the country as a whole should be assigned to the federal government, and matters of a decidedly regional or local character should be assigned to the regional governments. In actual fact, however, there is a weak federal executive power whose relationship with the regional governments is not yet clearly coordinated. Constitutionally, the federal government is not effectively centralized through presidentialism. The president has a symbolic role. The federal executive power is vested in the Prime Minister and in the Council of Ministers which are politically accountable to the House of Peoples' Representatives in all the decisions it adopts. As enshrined in Article 77 of the Constitution, the Council of Ministers among others, ensures implementation of laws, and decisions adopted by the Federal Parliament, decided organizational structure of Ministries and other Federal Parliament, decided on organizational structures of Ministries and other organs of government responsible to it, coordinates the activities of organs of government, discusses and refers draft proclamations to the Lower House, and decides on the general socio-economic and political strategies the country should pursue.

State Councils of the regions are also responsible for appointment of the highest executives in charge of the various organs of State. The respective constitution of the various regional states stipulates that the State Councils are entrusted with the power of forming the Executive Committee, which is the highest state-level executive organ. State executive bodies are responsible for the execution of laws, policies and strategies falling within their jurisdiction. These include administering land and other natural resources in keeping with Federal laws, formulating and execution economic, social and development policies, strategies and plans of the state in question.

Consequently, health, security, and agricultural development and similar other matters seriously demand that the pertinent Federal and State executive organs work in close collaboration. There could be contexts where the common decisions of the two become vital to ensure maximum benefits in a particular area. But there is a weak exchange of information between the two levels. Under such circumstances, it is possible that the regional states can only issue and enforce their own laws not that of the federal government.

The most important factor which underlines the further autonomy of the regional states is the assigning of residual power. The Federal Constitution as stipulated in Article 52(1) states that "All powers not given expressly to the Federal Government alone, or concurrently to the Federal Government and States are reserved to the States". Accordingly, any residual power unspecified in the constitution is left for the States. It thus allocates residual authority to the constituent units. The significance of the residual power is that the regional states can exercise legislative power over matters not specified in the constitution.

The above three points suggest that the relationship between the federal government and the regional states is asymmetrical, even though they are in principle considered to be equal. Nonetheless, the financial and manpower resources of the regions are very limited. The revenue base of the regions is not that productive and expansive. Currently, they are dependent on federal fund, particularly for capital budget. They are not yet economically strong to claim that their laws supersede that of the federal law. According to the constitution, they are given all the power to develop their region.

As can be inferred from Sub-Article 7 of Article 62 of the FDRE Constitution, which enumerates the powers and functions of the House of Federation, there is a possibility by which the Federal Government may transfer revenue to the regional governments. Such a system of transfer payments or grants, by which a central government shares its revenues with lower levels of government, is an important aspect of the subject matter of ‘fiscal federalism’. The underlying rationale behind transfer of revenue is the existence of a fiscal gap at the sub-national level emanating from lack of locally generated own revenue to finance own expenditure; differences in the regions’ level of economic development and endowment with natural resources lead to the formation of a fiscal gap.

Federal governments use this power to enforce national rules and standards. Such transfers of revenues usually fall under three categories: conditional, unconditional and equalization grants. A conditional transfer from a federal body to a state, or other territory, involves a certain set of conditions. If the lower level of government is to receive this type of transfer, it must agree to the spending instructions of the federal government. The second type of grant, unconditional, is usually a cash or tax point transfer, with no spending instructions. Unconditional grants are usually general purpose grants aimed at addressing vertical imbalances. The third type of grant, equalization grant, is used to address horizontal imbalances between regional governments through the channeling of resources from the relatively wealthier regions to poorer ones; thereby equalizing the capacity of regional governments to provide a national standard level of goods and services.

• Administrative Law (30)
• African Human Rights Law (18)
• African Union Law (6)
• Alternative Dispute Resolution (33)
• Bankruptcy Law (4)
• Civil Procedure (12)
• Conflict Laws (3)
• Constitutional Law (5)
• Construction Law (3)
• Contract Law (7)
• Criminal Law (10)
• Criminal Procedure (6)
• Criminology (4)
• Customary Law (4)
• Employment and Labor Law (17)
• Environmental Law (5)
• Evidence Law (5)
• Family Law (5)
• Gender and the law (4)
• Human Right Law (5)
• Humanitarian Law (7)
• Insurance, Banking and Negotiable Instrument Law (6)
• Intellectual Property Law (4)
• International Organizations (4)
• Introduction to law and Law of Persons (4)
• Investment Law (10)
• Islamic Law (2)
• Judgment writing (0)
• Jurisprudence (1)
• Land Law (10)
• Law and Development (0)
• Legal History (0)
• Legal Profession (0)
• Legal Research Methods (0)
• Legal Writing (0)
• Legislative Drafting (0)
• Maritime Law (3)
• Non-Contractual Liability (Tort Law) (10)
• Pre-Trial Skills and Trial Advocacy (0)
• Property Law (27)
• Public Enterprises and Cooperatives (0)
• Public International Law (0)
• Refugee Law (0)
• Sales and Security Devices (0)
• Sentencing and Execution (4)
• Succession Law (6)
• Taxation Law (4)
• Trade and Business Organizations (2)
• Administrative Contract (16)
• Federalism (3)

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

• We're Hiring!
• Help Center

Assignment of VAT Revenue and Decentralization of its Administration: the Case of Ethiopia

This project tries to look at decentralization of VAT revenue and administration to sub national governments in Ethiopia in light of the international practices. It used individual in-depth interview to collect primary data from Ethiopian revenue and custom Authority (ERCA), Addis Ababa regional city administration tax office and ministry of finance and economic development (MOFED). The methods used for analysis were both qualitative and quantitative. The project discusses the problems in connection with decentralization of VAT administration and assignment of VAT revenue. The project suggests that decentralization of VAT administration needs capable and autonomous regional government and strong central government that could monitor and evaluate decentralization; and the assignment of VAT revenue also needs the central governments' follow up to minimize the distortions and should be applied in consistent with the constitution

Related Papers

turuneh tafa

International Business & Economics Studies

Kanbiro O R K A I D O Deyganto

This study was set out to assess value added tax administration in Ethiopian ministry of revenue Hawassa branch. To achieve the objective of this study, the researcher employed a mixed research approach and descriptive research design to describe the current status of value-added tax administration practice, performance, challenges, and opportunities in the ministry of revenue Ethiopia. Descriptive statistics was employed to analysis the data. The results of this study confirmed that VAT administration practice was challenged by lack of clarity and simplicity of tax procedure, lack of awareness of taxpayers, nepotism in the tax system, and lack of a sufficient number of skilled personnel on an automated system for customs data management, gaps in the administration in such areas as refunding, invoicing and filing requirements. Hence, the study suggested the ministry of revenue Hawassa branch and tax policy makers in Ethiopia VAT revenue performance and mitigates the challenges faced...

Journal of Economics and Sustainable Development

Alebel Woretaw

habtamu andargie

VAT (Value Added Tax) registration is the primary concern in the VAT administration system for any country in the world. Appropriate registration of traders who fulfilled the legal requirements is a crucial point for the implementation of VAT laws. The justification for the researcher to conduct this research was, on one hand, the existences of many unlawful VAT-registered persons in the study area. On the other hand, there are larger numbers of VAT unregistered traders while they should have been registered which in turn results from unfair competition among traders. Besides, the high compliant cost of VAT registration coupled with a lack of awareness on the benefits of VAT registration results from complicated problems of VAT registration. The principal objectives of this research were to examine reasons for refusals of traders for VAT registration and to explore the factors that contribute to the weak enforcement of VAT laws. In doing this, the study employed qualitative research...

International journal of health sciences

haile mekonnen

The main objective of this study was to identify that the factors affecting effectiveness of administration and collection of revenue in afar region in case of samara logia town. The data used in this study consists of both primary and secondary data. The primary data was collected through standard questionnaire. The demographics of the respondents were firstly established in the questionnaire. The questionnaire was comprised of both closed and open ended questions. Secondary data was also collected from official documents and records relating to the case under study; Based on the above discussion and analysis, the researcher concluded the following facts in relation to taxpayers in the study area: Most of category ‘’A’’ and ‘’B’’ taxpayers are convinced for the fairness the tax assessment in Samara-logia town. However, some of the above group taxpayers and most of category ‘’C’’ taxpayers do not agree with about the fairness of the tax assessment in Samara-logia town. This might be...

Research Journal of Finance and Accounting

abraha hiluf

Taxes are involuntary fees levied on individuals or corporations and enforced by government entity in order to finance government activities (Lea D.Uradu, 2020). Lea D.Uradu in addition stated, government usually collects taxes to help fund public works, services and to build and maintain the infrastructures used in a country and used for the betterment of the economy and all living in it. Similarly, (UNDP Ethiopia, 2016:p2) stated that, a good tax system follows the principles of efficiency, fairness and easy to administer. Keeping the benefits of tax, the government of Ethiopia collects tax revenue from Domestic tax and Customs duty tax sources. However, the researcher understood that, There are plenty of challenges in tax collection process that do not seen by previous studies and many tax studies are not clearly identified/stated which tax source have great share in tax revenue collection in Ethiopia,(i.e., many people are confusing that which source of tax have great share in Ethiopia tax system). Thus, the objective of the article was to look which tax revenue has great share/contribution to the economy (i.e., Domestic tax or Customs duty tax?) and the challenges to perform tax in Ethiopia. To achieve the objective, a quantitative data of six(6) years tax revenue collected by Ethiopia's ministry of revenues were taken for research question one and a multiple regression model were formulated. Regarding to second question, 31 field questionnaires was collected from randomly selected tax officials. And for the collected data, both descriptive and inferential statistics (regression analysis & nonparametric test) analysis method was applied .In conclusion, the author found that domestic tax revenue have great share to Ethiopian Economy than tax from customs duty(but not to undermine its share). And the tax collection challenges are identified as unstructured economy, poor tax paying habit and maladministration of officials respectively. Thus, the author recommended that the government of Ethiopia as well as the tax collecting Authority should concentrate on effective domestic tax collection, organize the economy to suit tax collection, create tax knowhow on the society and avoid tax maladministration.

journal of accounting finance and auditing studies (JAFAS)

Wondimu Sebhat Tebebu

Abhishek Tripathi

Every government requires funds for the performance of its various functions. The main sources of financing government expenditure are taxations. Especially developing countries like Ethiopia are used to raise revenue collection from tax for their economic development. One of the major aim of the tax system in Ethiopia is to maximize domestic revenue by collecting sufficient taxes. To achieve this, the Ethiopian government creates different tax reform programs and the reform improved the application of business income tax with more simplified standard assessment methods of presumptive taxes. This study is an attempt to identify the efforts done by govt. for collecting the tax with the help of Statistical toolMultiple regression analysis which reveals that tax assessment affects the tax collection performance. Thus, it can be concluded that the tax law enforcement has its own contribution to tax collection performance and the revenue authority of the town should consider as of the ot...

Tax administration is the identification of tax liability, the assessment of this liability, and the collection, prosecution and penalties imposed on reluctant tax payers. If the tax administration is not effective, it is difficult for the government to collect the required amount of domestic revenue for its activities. Therefore, improving tax administration is quite necessary for developing countries like Ethiopia to improve the domestic tax revenue through voluntary compliance. This study aimed to assesses the effectiveness of tax administration in Kolfe Keranio sub city administration revenue office. The target population of the study included tax payers and employees of the office with 150 tax payers and 75 employees. In order to address the research questions, qualitative and quantitative research approaches were employed. The researcher used both primary and secondary sources of data. In order to get primary information, questionnaire and interview were employed. As important...

Ghetnet Metiku

The significance of good governance in ensuring effective tax administration in the public sector and enhancing tax collection is an undeniable fact that is generally accepted. Yet, there is scanty empirical evidence on the actual application of the principles of good governance in the tax administration system. The purpose of this study is to investigate the measures taken to institutionalize the principles of good governance within the Ethiopian Revenues and Customs Authority (ERCA). In terms of scope, the study focuses on the assessment and collection of taxes from category " C " taxpayers in selected sub-city branches of the ERCA in Addis Ababa. The research is essentially a case study that uses quantitative and qualitative data gathered from primary and secondary sources to inform its findings. The bulk of the data for this study was generated from primary sources namely, the leadership and staff of the ERCA and category 'c' taxpayers as clients of the Authority. The study accessed these informants through key informant interviews, knowledge, attitude and perception (KAP) questionnaires and survey questionnaires. The research also utilized secondary sources in the form of documentation on the activities of the ERCA. Secondary data was gathered from both print and electronic sources including academic literature, laws and policies, organizational documents, and the ERCA website.

Loading Preview

Sorry, preview is currently unavailable. You can download the paper by clicking the button above.

RELATED PAPERS

Odd-Helge Fjeldstad

Sebsbie Fekade

Cathrine Makuya

RELATED TOPICS

•   We're Hiring!
•   Help Center
• Find new research papers in:
• Health Sciences
• Earth Sciences
• Cognitive Science
• Mathematics
• Computer Science
• Academia ©2024

An official website of the United States government

Here's how you know

Official websites use .gov A .gov website belongs to an official government organization in the United States.

Secure .gov websites use HTTPS A lock ( Lock Locked padlock ) or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites.

Suspended Counterparty Program

FHFA established the Suspended Counterparty Program to help address the risk to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (“the regulated entities”) presented by individuals and entities with a history of fraud or other financial misconduct. Under this program, FHFA may issue orders suspending an individual or entity from doing business with the regulated entities.

FHFA maintains a list at this page of each person that is currently suspended under the Suspended Counterparty Program.

This page was last updated on 03/26/2024

Official websites use .gov

A .gov website belongs to an official government organization in the United States.

Secure .gov websites use HTTPS

A lock ( ) or https:// means you've safely connected to the .gov website. Share sensitive information only on official, secure websites.

CDC Current Outbreak List

Infectious disease outbreaks currently being reported on by CDC. Listings include those outbreaks for which content is currently published on the CDC website.

Recent investigations reported on CDC.gov

• Cucumbers – Salmonella Outbreak Announced June 2024
• Backyard Poultry – Salmonella Outbreaks Announced May 2024
• Organic Walnuts – E coli Outbreak Announced April 2024
• Fresh Basil – Salmonella Outbreak Announced April 2024
• Measles Outbreaks 2024 Announced January 2024
• Coronavirus Disease 2019 (COVID-19) Announced January 2020

Please see the Travelers’ Health site for a complete list.

In the last two years, CDC has sent scientists and doctors out more than 750 times to respond to health threats. Learn more below.

• Investigating Foodborne Outbreaks
• Waterborne Outbreaks Toolkit
• Ebola Outbreak History Announced September 2022
• Mpox Outbreaks Announced May 2022
• Multistate Foodborne Outbreaks – Foodborne outbreaks listed by year
• Hepatitis A Outbreaks – Hepatitis A outbreak investigations since 2013 where CDC supported or led the investigation.
• US Outbreaks Linked to Contact with Animals or Animal Products
• Health Alert Network – Health alerts, health advisories, updates, and info service messages. Designed for public health and medical communities.
• Recent Outbreaks and Incidents – Events involving the CDC Emergency Operations Center
• Morbidity and Mortality Weekly Report – Outbreak investigation reports included among other content. Note that outbreak material includes state health department investigations. Designed for public health and medical communities.

Exit Notification / Disclaimer Policy

• The Centers for Disease Control and Prevention (CDC) cannot attest to the accuracy of a non-federal website.
• Linking to a non-federal website does not constitute an endorsement by CDC or any of its employees of the sponsors or the information and products presented on the website.
• You will be subject to the destination website's privacy policy when you follow the link.
• CDC is not responsible for Section 508 compliance (accessibility) on other federal or private website.

• Election 2024
• Entertainment
• Newsletters
• Photography
• Personal Finance
• AP Investigations
• AP Buyline Personal Finance
• AP Buyline Shopping
• Press Releases
• Israel-Hamas War
• Russia-Ukraine War
• Global elections
• Asia Pacific
• Latin America
• Middle East
• Election Results
• Delegate Tracker
• AP & Elections
• Auto Racing
• 2024 Paris Olympic Games
• Movie reviews
• Book reviews
• Personal finance
• Financial Markets
• Business Highlights
• Financial wellness
• Artificial Intelligence
• Social Media

Nigeria is emerging as a critical mineral hub. The government is cracking down on illegal operations

Miners work at an illegal tin mining site in Jos, Nigeria, Wednesday, April 3, 2024. The recent arrests come as Nigeria seeks to regulate mining of critical minerals, curb illegal activity and better benefit from its mineral resources. (AP Photo/Sunday Alamba)

Women work at an Illegal tin mining site in Jos, Nigeria, Wednesday, April 3, 2024. The recent arrests come as Nigeria seeks to regulate mining of critical minerals, curb illegal activity and better benefit from its mineral resources. (AP Photo/Sunday Alamba)

A woman works at an Illegal tin mining site in Jos, Nigeria, Wednesday, April 3, 2024. The recent arrests come as Nigeria seeks to regulate mining of critical minerals, curb illegal activity and better benefit from its mineral resources. (AP Photo/Sunday Alamba)

• Copy Link copied

ABUJA, Nigeria (AP) — Nigeria’s government is cracking down on illegal mining, making dozens of arrests of unlicensed miners since April for allegedly stealing the country’s lithium, a critical mineral used in batteries for electric vehicles, smartphones and power systems.

The recent arrests come as Nigeria seeks to regulate its mining operations of critical minerals, curb illegal activity and better benefit from its mineral resources. The clean energy transition, a shift away from coal, oil and gas and toward renewable energy and batteries has spiked global demand for lithium, tin and other minerals. Illegal mines are rife in the country’s fledging industry as corruption among regulatory officials is common and the mineral deposits are located in remote areas with minimal government presence. Officials say profits from illicit mining practices has helped arm militia groups in the north of the county.

In the most recent arrests in mid-May, a joint team of soldiers and police conducted a raid on a remote market in Kishi, in the country’s southwestern Oyo State. Locals said the market, once known for selling farm produce, has become a center for illicit trade in lithium mined in hard-to-reach areas. The three-day operation resulted in the arrest of 32 individuals, including two Chinese nationals, local workers and mineral traders, according to the state government and locals. Loads of lithium were also seized.

Miners work at an illegal tin mining site in Jos, Nigeria, Wednesday, April 3, 2024. (AP Photo/Sunday Alamba)

Jimoh Bioku, a Kishi community leader, said there had been “clandestine searches” for the mineral at remote sites tucked away in the bush in the past years by Chinese nationals before “they engaged people to dig for them and turned the market into a transit point.” The community was “particularly worried about the insecurity that usually follows illegal mining and that was why we reported to the state government,” he said.

China is the dominant player in the global EV supply chain, including in Nigeria where China-owned companies employ mostly vulnerable people leaving Nigeria’s far north — ravaged by conflicts and rapid desertification — to work in mining operations throughout the country. China’s nationals and companies are frequently in the spotlight for environmentally damaging practices, exploitative labor and illicit mining. There have been at least three cases of illegal mining arrests involving Chinese nationals in two months.

President Bola Tinubu has repeatedly blamed illegal mining for the worsening conflicts in the country’s north and asked the international community for help to stop the problem, which provides armed groups with the proceeds needed to sustain and arm themselves.

Women work at an illegal tin mining site in Jos, Nigeria, Wednesday, April 3, 2024. (AP Photo/Sunday Alamba)

The Chinese embassy in Abuja did not respond to an Associated Press request for comment on the arrests and claims of illegal operations. But in a statement last year following a report by The Times of London alleging Chinese miners were bribing militants for access, the embassy said it “always encouraged and urged the Chinese companies and nationals in Nigeria to abide by the laws and regulations of Nigeria.”

Nigeria is emerging as a new source of lithium in Africa as the world’s largest producers, like Australia and Chile, are unable to fulfill the growing demand worldwide. But illegal activities thrive in Nigeria’s extractive sector, denying the government due revenues, said Emeka Okoro, whose Lagos-based SBM Intelligence firm has researched illicit mining and terrorism financing in northern Nigeria.

And the combination of conflict and climate change effects, such as once fertile land rapidly turning into useless arid sand in northern Nigeria, has produced a cheap workforce for mining sites.

The arrests of “both Chinese nationals and young Hausa boys from conflict-affected regions underscore a troubling pattern,” Okoro told the AP. “The socioeconomic strain stemming from conflict and the repercussions of climate change has given rise to a vulnerable demographic desperate for survival.”

To fight resource theft that causes losses of $9 billion to the government annually, according to the country’s extractive industry transparency watchdog, the West African nation has set up a 2,200-strong “corps of mining marshals” earlier in the year.

A woman works at an Illegal tin mining site in Jos, Nigeria, Wednesday, April 3, 2024. (AP Photo/Sunday Alamba)

While existing law enforcement agencies are still combating the problem, the new corps is geared at curbing “the nefarious activities of illegal miners,” said Segun Tomori, spokesperson for the solid minerals ministry.

Before the Kishi raid, the mining corps arrested two trucks laden with lithium on the outskirts of the capital Abuja in April. Later that month, the corps raided a location in Karu, Nasarawa State, near Abuja, leading to the arrest of four Chinese nationals and the seizure of tons of lithium. Tomori said the cases are now in court.

On April 22, a federal court in Ilorin, in the north-central region, convicted two Chinese nationals for illegal mining and sentenced them to a one-year jail term, although with an option of a fine.

Nigeria has long neglected the solid minerals sector, which allows some communities like the northern-central town of Jos — which is tin-abundant — to depend on subsistence mining for their livelihood.

For those communities where livelihood is tied to mining, Tomori said the government is encouraging artisanal miners there to form cooperatives and operate legally.

The Associated Press’ climate and environmental coverage receives financial support from multiple private foundations. AP is solely responsible for all content. Find AP’s standards for working with philanthropies, a list of supporters and funded coverage areas at AP.org .