Fiscal Federalism: Principles and Practice of Multiorder Governance

Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Preface......Page 9
PART ONE DESIGNING FISCAL CONSTITUTIONS......Page 11
Unitary Government......Page 14
Federal Government......Page 15
Market Preserving Federalism......Page 18
Role of Government in Federal Economies......Page 19
GOVERNMENT INTERVENTION IN A MARKET ECONOMY......Page 21
Sources of Inefficiency in the Market Economy......Page 27
Externalities......Page 28
Economies of Scale......Page 29
Absence of Markets......Page 30
Imperfect Information......Page 31
Time Inconsistency Issues......Page 32
Unequal Incomes......Page 34
Social Insurance......Page 35
Political Economy Considerations......Page 36
The Selfish Voter......Page 37
The Leviathan......Page 38
Efficiency Considerations in a Federal Economy......Page 39
The Internal Common Market......Page 40
Local Public Goods and Externalities......Page 45
Interjurisdictional Spillovers......Page 46
Horizontal Fiscal Externalities......Page 48
Vertical Fiscal Externalities......Page 53
Fiscal Inefficiency......Page 56
Tax Harmonization......Page 60
Other Sources of Inefficiency in Federations......Page 62
Vertical Equity in a Federal State......Page 64
Horizontal Equity in a Federal State......Page 66
ADDITIONAL CONSIDERATIONS IN DEVELOPING COUNTRIES......Page 67
Distinguishing Features of Developing Federations......Page 68
Sources of the Impetus for Decentralization......Page 69
INTRODUCTION......Page 71
THE DECENTRALIZATION OF FUNCTIONS IN A FEDERAL SYSTEM......Page 76
The Pros and Cons of Decentralizing Expenditure Responsibilities......Page 78
State and Local Public Goods......Page 79
Quasi-Private Goods and Services......Page 80
Targeted Transfers......Page 81
Local Preferences for Redistribution......Page 82
Fiscal and Political Accountability......Page 83
Fiscal Inefficiency and Inequity......Page 85
Interjurisdictional Spillovers......Page 86
Expenditure Competition......Page 89
Economies of Scale......Page 90
Lack of Harmonization of Public Expenditures......Page 92
Compromising Federal Equity Responsibilities......Page 93
The Pros and Cons of Decentralizing Taxation Responsibilities......Page 95
Forms of Tax Decentralization......Page 96
Efficiency Costs of Tax Decentralization......Page 97
Equity Costs of Tax Decentralization......Page 99
Criteria for Tax Assignment to Lower-Level Jurisdictions......Page 101
THE OVERALL ROLES OF FEDERAL AND STATE GOVERNMENTS......Page 103
The Federal Responsibility for Equity......Page 105
Efficiency of the Internal Common Market......Page 107
National Public Goods and Interjurisdictional Spillovers......Page 113
Provision of Quasi-Private Goods and Services......Page 115
Tax Assignment and Harmonization......Page 116
Transfers and Social Insurance......Page 118
FEATURES OF THE OPTIMAL ASSIGNMENT OF RESPONSIBILITIES......Page 120
Expenditure Assignment......Page 121
Regulatory Functions......Page 122
Revenue-Raising Responsibilities......Page 123
Impact of Decentralization on Service Delivery......Page 129
The Impact of Decentralization on Economic Growth......Page 131
Conclusions......Page 132
Catering to Regional Preferences and Needs......Page 134
Information Asymmetries......Page 137
Political Economy Arguments......Page 139
Other Considerations......Page 141
Public Goods......Page 143
Public Services......Page 147
Social Insurance......Page 149
Transfers to Individuals......Page 153
Transfers to Businesses......Page 155
Infrastructure......Page 156
EXCLUSIVE VERSUS SHARED ASSIGNMENT......Page 158
Exclusive State Responsibility with Federal Oversight......Page 159
With Federal Paramountcy......Page 161
MANDATES......Page 163
PRIVATE PROVISION OF PUBLIC GOODS OR SERVICES......Page 165
FOUR Revenue Assignment......Page 167
GENERAL PRINCIPLES OF TAX ASSIGNMENT......Page 169
Efficiency of the Internal Common Market......Page 171
National Equity......Page 172
Administrative and Compliance Costs......Page 174
Fiscal Accountability......Page 175
Mobility of the Tax Base......Page 176
The Suitability of the Base for Redistributive Purposes......Page 177
Unequal Distribution of Tax Bases......Page 178
Elasticity of the Tax Base......Page 179
Further Administrative Cost Considerations......Page 180
ASSIGNMENT BY TYPE OF TAX......Page 181
Personal Income Taxes......Page 182
Corporation Income Taxes......Page 185
General Sales Taxes......Page 188
Excise Taxes......Page 193
Payroll Taxes......Page 195
Resource Taxes......Page 196
Property Taxes......Page 198
Pricing for Public Services......Page 200
Federal-State Co-occupation of Tax Bases......Page 201
TAX HARMONIZATION AND COORDINATION......Page 202
The Objectives of Tax Harmonization......Page 206
Revenue Sharing......Page 208
State Surtax......Page 210
Tax on Base System......Page 212
Uncoordinated Tax Decentralization......Page 214
The Crucial Role of Equalization......Page 216
INTRODUCTION......Page 217
THE SETTING......Page 220
Private-Sector Adjustments......Page 223
Consequences for the Public Sector......Page 226
Policy Responses in the Unitary Nation......Page 228
NATURAL RESOURCE ISSUES IN A FEDERATION......Page 234
Federal Ownership of Natural Resources......Page 235
State Ownership of Natural Resources......Page 239
FEDERAL RESPONSES TO A NATURAL RESOURCE BOOM......Page 242
Horizontal Balance with Natural Resource Disparities......Page 244
Dealing with Vertical Balance......Page 246
A Suggested Option......Page 250
LOCAL GOVERNMENT AND LOCAL GOVERNANCE......Page 252
Principles and Theories......Page 253
The Decentralization Theorem......Page 254
Implementation Mechanisms......Page 255
Local Government as a Handmaiden of a Higher Government Order: Traditional Fiscal Federalism Perspectives......Page 256
Local Government as an Independent Facilitator of Creating Public Value: New Public Management Perspectives......Page 263
Local Government as an Institution to Advance Self-Interest: The Public Choice Approach......Page 265
The Government as a Runaway Train: NIE Concerns with the Institutions of Public Governance......Page 266
Local Government as a Facilitator of Network Forms of Local Governance......Page 267
A Synthesis: Toward a Framework for Responsive, Responsible, and Accountable Local Governance......Page 268
Implications for Division of Powers within Nations: Role Reversals for Central and Local Governments......Page 272
CONCLUDING REMARKS......Page 275
SEVEN Local Governance in Practice......Page 276
The Swiss Model......Page 277
The French Model......Page 278
The British Model......Page 279
The Chinese Model......Page 280
The North American Model......Page 281
Legal Status of Local Governments......Page 282
Relative Importance of Local Governments......Page 283
Population Size Covered by Local Governments......Page 284
Local Spending Responsibilities......Page 286
Local Revenues and Revenue Autonomy......Page 287
Facilitating Local Access to Credit......Page 289
Some Conclusions......Page 290
Legal Status of Local Governments......Page 291
Relative Importance of Local Governments......Page 292
Population Size Covered by Local Governments......Page 293
Local Spending Responsibilities......Page 295
Local Revenues and Revenue Autonomy......Page 296
Facilitating Local Access to Credit......Page 298
Some Conclusions......Page 300
PART TWO REVENUE SHARING AND FISCAL TRANSFERS......Page 301
EIGHT Revenue Sharing......Page 303
Arguments for Revenue Sharing......Page 305
Drawbacks of Revenue Sharing......Page 306
Income Tax......Page 308
General Sales Tax......Page 309
Resource Taxes......Page 310
Other Issues with Specific Revenue Sharing......Page 311
General Revenue Sharing......Page 312
ASSESSMENT......Page 313
Forms of Intergovernmental Transfers......Page 316
Instruments of Intergovernmental Finance......Page 317
Achieving Results-Based Accountability through Performance-Oriented Transfers......Page 324
Vertical Fiscal Gap......Page 331
Fiscal Inequity......Page 333
Fiscal Inefficiency......Page 335
Interstate Spillovers......Page 336
Expenditure Harmonization: National Standards......Page 337
Some Features of Federal-State Fiscal Arrangements......Page 338
Tax Harmonization and Coordination Arrangements......Page 340
Closing the Fiscal Gap......Page 341
Institutional Control......Page 342
The Rationale for Conditional Grants......Page 343
Efficiency in the National Common Market......Page 344
Infrastructure......Page 345
Strategic Arguments......Page 346
Difficulties with Conditional Grants......Page 347
Grants Based on Tax Effort......Page 349
UNCONDITIONAL TRANSFERS AND EQUALIZATION......Page 350
Equalization......Page 351
The Benchmark Equalization System......Page 352
Deviations from the Benchmark System......Page 355
Calculating the VFG......Page 357
POLICY COORDINATION AND HARMONIZATION......Page 359
DESIGNING FISCAL TRANSFERS......Page 361
Bridging Vertical Fiscal Gaps......Page 363
Bridging the Fiscal Divide through Fiscal Equalization Transfers......Page 365
Measuring Fiscal Capacity......Page 368
Measuring Expenditure Needs......Page 370
Practical Difficulties in Equalizing Expenditure Needs: Australia’s Experience......Page 378
Conclusions Regarding the Practice of Fiscal Need Equalization......Page 379
Frequently Raised Concerns in Designing Equalization Transfers......Page 380
Reflections on Comparative Practices of Fiscal Equalization Transfers......Page 382
Setting National Minimum Standards......Page 386
Dealing with Infrastructure Deficiencies and Creating Macroeconomic Stability in Depressed Regions......Page 391
Institutional Arrangements for Fiscal Relations......Page 393
Negative Lessons: Types of Transfers to Avoid......Page 397
Positive Lessons: Principles to Adopt......Page 400
PART THREE FINANCE AND PROVISION OF PUBLIC SERVICES......Page 403
Provision of Health and Education Services......Page 405
Financing of Health and Education Services......Page 411
NATIONAL STANDARDS......Page 419
For Health......Page 420
For Education......Page 422
USE OF SPECIAL-PURPOSE BODIES......Page 423
ROLE OF USER FEES......Page 425
TWELVE Finance and Provision of Infrastructure......Page 428
ASSIGNMENT OF RESPONSIBILITY FOR CAPITAL PURCHASES......Page 429
Borrowing and Vertical Fiscal Gap......Page 431
Capital Funding as a Component of Federal Grants......Page 432
State-Local Borrowing......Page 433
Riskiness......Page 434
Soft Budget Constraints......Page 436
Migration......Page 438
Investment......Page 439
Unused Capital Funds, Multiperiod Costs, and Future Requirements......Page 441
ACCOUNTABILITY AND GOVERNANCE......Page 442
Efficient Pricing......Page 443
Obtaining Rents on Publicly Owned Resources......Page 446
The Case for Capital Grants......Page 447
Access to Capital Markets to Finance Capital Projects......Page 448
Central Objectives......Page 450
Backlogs......Page 451
Forms of Capital Grants......Page 452
THIRTEEN Poverty Alleviation in Federations......Page 455
POLICY INSTRUMENTS......Page 456
Cash Transfers......Page 457
In-Kind Transfers......Page 458
Proactive Poverty Programs......Page 460
ASSIGNMENT BY LEVEL OF GOVERNMENT......Page 461
State Government......Page 462
Local Government......Page 464
Central Government......Page 465
Equalizing State Capacities......Page 466
Inducing Comparable State Poverty Alleviation Programs......Page 467
National Standards......Page 468
COORDINATION WITH OTHER PUBLIC PROGRAMS......Page 469
PART FOUR CHALLENGES AND RESPONSES......Page 471
FOURTEEN Fiscal Federalism and Macroeconomic Governance......Page 474
INSTITUTIONAL ENVIRONMENT FOR MACROECONOMIC MANAGEMENT......Page 475
Institutional Setting for Monetary Policy......Page 476
Monetary Management in Brazil: A Decade of Successful Reforms......Page 480
Monetary Management in China: Still Muddling Through......Page 481
Fiscal Federalism as a Bane for Fiscal Prudence......Page 483
Fiscal Federalism as a Boon to Fiscal Prudence......Page 484
Fiscal Policy Coordination in Mature Federations......Page 487
Fiscal Policy Coordination in Brazil, from Fiscal Distress to Fiscal Discipline: A Giant Leap Forward......Page 491
Fiscal Management in China: An Unmet Challenge......Page 495
Fiscal Policy Coordination: Some Conclusions......Page 497
Preservation of the Internal Common Market......Page 498
Tax Harmonization and Coordination......Page 499
Transfer Payments and Social Insurance......Page 500
Regional Fiscal Equity......Page 501
Fiscal Decentralization and Fiscal Performance: Some Conclusions......Page 502
SOME LESSONS FOR DEVELOPING COUNTRIES......Page 503
Legislated Fiscal Rules: Do They Matter for Fiscal Outcomes?......Page 505
FIFTEEN Interregional Competition and Policies for Regional Cohesion and Convergence......Page 508
Matching Public Services with Citizen Preferences......Page 509
Loosening the Grip of Rent Seekers and the Corrupt......Page 510
Improving the Quality, Quantity, and Access of Local Public Services......Page 511
Weakening Internal Common Market......Page 512
Underprovision of Merit Goods and Social Policy Fallout......Page 513
Wasteful Tax Competition......Page 514
Encouraging Pork-Barrel Politics......Page 516
Horizontal Coordinating Mechanisms......Page 517
Constitutional Provisions......Page 518
Preservation of the Internal Common Market......Page 519
Tax Harmonization and Coordination......Page 520
Intergovernmental Fiscal Transfers......Page 521
Facilitating Local Access to Credit......Page 522
Mitigating Adverse Consequences of Globalization......Page 523
A Paternalist Approach or a Do-Good Approach......Page 524
CONCLUSION......Page 526
SIXTEEN Decentralized Governance and Corruption......Page 527
FUNDAMENTAL CONCEPTS AND CONCERNS......Page 528
WHAT DRIVES CORRUPTION?......Page 530
Principal-Agent Models......Page 531
New Public Management Frameworks......Page 535
Neo-Institutional Economics Frameworks......Page 536
EMPIRICAL PERSPECTIVES......Page 537
How to Formulate a Strategy......Page 538
Insights into Past Failures......Page 540
Weak Monitoring and Vertical Controls......Page 541
Political Decentralization and Lack of Discipline......Page 542
Interest Group Capture......Page 543
Competition among Local Governments......Page 544
Political Decentralization......Page 545
Fiscal Decentralization......Page 546
CONCLUSIONS......Page 547
SEVENTEEN Adapting to a Changing World......Page 548
GOVERNANCE IMPLICATIONS OF GLOBALIZATION AND THE INFORMATION REVOLUTION......Page 549
Reorientation of the Nation-State, Emergence of Supranational Regimes, and Strengthening of Localization......Page 550
The Information Revolution and Citizen Empowerment......Page 551
Internationalization of Cities and Regions......Page 552
A Potential Source of Conflict within Nations......Page 553
Reorienting the State as a Counterweight to Globalization......Page 554
LOCALIZATION......Page 555
Emerging Jurisdictional Realignments......Page 556
Emerging Imperatives for Rethinking Fiscal Federalism......Page 557
Division of Fiscal Powers......Page 559
Bridging the Fiscal Divide within Nations......Page 561
Fiscal Prudence and Fiscal Discipline under ‘‘Fend-for-Yourself Federalism’’......Page 562
Fragmentation of the Internal Common Market......Page 563
CONCLUSIONS: THE NEW VISION OF MULTIORDER GOVERNANCE......Page 564
References......Page 567
Index......Page 595