The asymmetric nature of fiscal decentralization: theory and practice

Sacchi, Agnese and Salotti, Simone (2014): The asymmetric nature of fiscal decentralization: theory and practice.

Abstract

A relevant mismatch between tax and expenditure decentralization characterizes many industrialized countries. The former is usually less pronounced than the latter, resulting in asymmetric fiscal decentralization arrangements. After a brief discussion of the stylized facts in advanced countries, we investigate the nature of this asymmetry using a theoretical framework that explains why it is difficult to tackle it, despite a consensus on the benefits of a well-balanced decentralization process. We find that asymmetry is intrinsic to fiscal decentralization, even in a scenario where clear advantages from well-developed fiscally decentralized systems arise. This implies that both empirical and theoretical contributions would benefit by taking into account the welfare-reducing asymmetric nature of fiscal decentralization.

• Item Type: MPRA Paper
• Language: English
• Keywords: Expenditure decentralization, fiscal mismatch, local revenue, tax autonomy
• Subjects: H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H71 - State and Local Taxation, Subsidies, and Revenue; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H72 - State and Local Budget and Expenditures; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession

References

Afonso, A., Hauptmeier, S. (2009). Fiscal behavior in the European Union. Rules, fiscal decentralization and government indebtedness, ECB Working Paper 1054.

Akai, N., Sakata, M. (2002). Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States. Journal of Urban Economics 52, 93–108.

Alegre, J.G. (2010). Decentralization and the composition of public expenditure in Spain. Regional Studies 44(8), 1067-1083.

Alesina, A., Spolaore, E. (1997). On the number and size of nations. The Quarterly Journal of Economics 112(4), 1027-1056.

Arzaghi, M., Henderson, J.V. (2005). Why countries are fiscally decentralizing. Journal of Public Economics 89, 1157-1189.

Bahl, R.W., Linn, J. (1992). Urban Public Finance in Developing Countries. New York: Oxford University Press.

Bähr, C. (2008). How does sub-national autonomy affect the effectiveness of structural funds? Kyklos 61, 3–18.

Bardhan, P. (2002). Decentralization of governance and development. The Journal of Economic Perspectives 16(4), 185-205.

Blöchlinger, H., Égert, B. (2013). Decentralisation and economic growth – part 2: the impact on economic activity, productivity and investment. OECD Working Papers on Fiscal Federalism 15.

Blöchliger, H., Vammalle, C. (2012), Reforming Fiscal Relations: Beyond the Zero-Sum Game, OECD Publishing.

Boadway, R., Cuff, K., & Marchand, M. (2003). Equalization and the decentralization of revenue–raising in a federation. Journal of Public Economic Theory 5(2), 201-228.

Boetti, L., Piacenza, M., Turati, G. (2012). Decentralization and local governments’ performance: how does fiscal autonomy affect spending efficiency? FinanzArchiv 68(3), 269-302.

Bordignon, M., Minelli, E. (2001). Rules transparency and political accountability. Journal of Public Economics 80(1), 73-98.

Bordignon, M., Piazza, S. (2010). Who do you blame in local finance? An Analysis of Municipal Financing in Italy. CESifo Working Paper no. 3100.

Bosch, N., Durán, J.M. (2008). Fiscal Federalism and Political Decentralization. Lessons from Spain, Germany and Canada. Edward Elgar Publishing Inc., Cheltenham.

Canavire-Bacarreza, G., Martinez-Vazquez, J. (2013). Fiscal decentralization and economic crisis. Report on Fiscal Federalism 2012, Institute d’Economia de Barcelona (IEB), 36-44.

Claeys, P, Martire, F. (2011). If you want me to stay, pay. IREA Working Paper no. 2011/01.

Dziobek, C., Gutierrez Mangas, C., Kufa, P. (2011). Measuring fiscal decentralization - Exploring the IMF’s databases. IMF Working Paper 11/126.

Eichenberger, R. (1994). The benefits of federalism and the risk of overcentralization. Kyklos 47, 403–420.

Escolano, J., Eyraud, L., Badia, M., Sarnes, J., Tuladhar, A. (2012). Fiscal performance, institutional design and decentralization in European Union countries. IMF working paper 12/45.

Frank, J., Martinez-Vazquez, J. (2014). Decentralization and infrastructure: from gaps to solutions. International Center for Public Policy Working Paper 14-05.

Gemmell, N., Kneller, R., Sanz, I. (2013). Fiscal decentralization and economic growth in OECD countries: matching spending with revenue decentralization. Economic Inquiry 51(4), 1915-1931.

Jack, W (2004). The organization of public service provision. Journal of Public Economic Theory 6(3), 409–425.

Jin, J., Zou, H. (2005). Fiscal decentralization, revenue and expenditure assignments, and growth in China. Journal of Asian Economics, 16(6), 1047–1064.

King, D. (1984). Fiscal tiers—the economics of multi-level government. London, Allen and Unwin.

Kyriacou, A.P, Roca-Sagalés, O. (2011). Fiscal decentralisation and the quality of government in the OECD. Economics Letters 111(3), 191-193.

Lago Peñas, S. (2013). The New Budgetary Stability in Spain: A Centralising Approach. Report on Fiscal Federalism 2012, Institute d’Economia de Barcelona (IEB), 74-77.

Liberati, P. (2011). “Which tax” or “Which tax for what”? Tax assignment in the theory of fiscal federalism. Public Finance Review 39(3), 365-392.

Liberati, P., Sacchi, A. (2013). Tax decentralization and local government size. Public Choice 157(1), 183-205.

Lundholm, M. (2008). Decentralizing public goods production. Journal of Public Economic Theory 10(2), 259-279.

Marcos, A. L., López Laborda, J. (2013). Regional Public Finances During the Crisis: From Peace of Mind to Agitation. Report on Fiscal Federalism 2012, Institute d’Economia de Barcelona (IEB), 26-35.

Martinez-Vazquez, J., McNab, R.M. (2003). Fiscal decentralization and economic growth. World Development 31(9), 1597-1616.

McLure, C. (1998). The revenue assignment problem: ends, means, and constraints. Public Budgeting and Financial Management 9(4), 652-683.

McLure, C., Martinez-Vazquez, J. (2000). The assignment of revenues and expenditures in intergovernmental fiscal relations. Paper prepared for the core course on Intergovernmental Relations and Local Financial Management, World Bank Institute, Washington, D.C.: World Bank.

Musgrave, R. (1959). The Theory of Public Finance: A Study in Public Economy. New York, McGraw-Hill.

Musgrave, R. (1983). Who should tax, where and what. In McLure, C.E. (ed.), Tax Assignment in Federal Countries. Centre for Research on Federal Financial Relations, Canberra, Australian National University, 2–19.

Oates, W.E. (1972). Fiscal Federalism. Harcourt Brace, New York, NY.

OECD (2006). Intergovernmental Transfers and Decentralised Public Spending. Working Paper 3, Network on Fiscal Relations Across Levels of Government, OECD, Paris.

OECD, (2009a). The fiscal autonomy of sub-central governments: an update. Working Paper 9, Network on Fiscal Relations Across Levels of Government, OECD, Paris.

OECD (2009b). Tax and grants: on the revenue mix of sub-central governments. Working Paper 7, Network on Fiscal Relations Across Levels of Government, OECD, Paris.

OECD (2009c). The spending power of sub-central governments: a pilot study. Working Paper 8, Network on Fiscal Relations Across Levels of Government, OECD, Paris.

OECD (2012). Decentralisation and economic growth. Network on fiscal relations across levels of government. OECD, Paris.

Panizza, U. (1999). On the determinants of fiscal centralization: theory and evidence. Journal of Public Economics 74(1), 97-139.

Rodden, J. (2003). Reviving Leviathan: fiscal federalism and the growth of government. International Organization 57, 695–730.

Rodríguez-Pose, A., Tijmstra, S., Bwire, A., (2009). Fiscal decentralization, efficiency, and growth. Environment and Planning A 41, 2041–2062.

Sacchi, A., Salotti, S., (2014a). The effects of fiscal decentralization on household income inequality: some empirical evidence. Spatial Economic Analysis 9(2), .

Sacchi, A., Salotti, S. (2014b). How regional inequality affects fiscal decentralisation: accounting for sub-central governments autonomy. Environment & Planning C: Policy & Government 32(1), 144-162.

Shah, A. (1998). Fiscal federalism and macroeconomic governance: for better or for worse? World Bank Policy Research Working Paper 2005.

Stegarescu, D. (2005). Public sector decentralisation: measurement concepts and recent international trends. Fiscal Studies 26(3), 301-333.

Stegarescu, D. (2009). The effects of economic and political integration on fiscal decentralization: evidence from OECD countries. Canadian Journal of Economics 42(2), 694-718.

Stigler (1957). The tenable range of functions of local government. In US Congress Joint Economic Committee (Ed.), Federal Expenditure Policy for Economic Growth and Stability, Washington, D.C., 213-219.

Thieben, U., (2003). Fiscal decentralization and economic growth in high-income OECD countries. Fiscal Studies 24(3), 237–274.

Thornton, J. (2007). Fiscal decentralization and economic growth reconsidered. Journal of Urban Economics 61(1), 64-70.

Tiebout, C. (1956). A pure theory of local expenditures. Journal of Political Economy 64(5), 416–424.

Tommasi, M., Weinschelbaum, F. (2007). Centralization vs. decentralization: a principal agent analysis. Journal of Public Economic Theory 9(2), 369-389.

Von Hagen, J., Foremny, D. (2013). Fiscal Federalism in Times of Crisis: Sharing the Cost of Adjustment. Report on Fiscal Federalism 2012, Institute d’Economia de Barcelona (IEB), 14-25.

Weingast, B.R. (2009). Second generation fiscal federalism: the implications of fiscal incentives. Journal of Urban Economics 65(3), 279-293.

Weingast, B.R. (2014). Second generation fiscal federalism: political aspects of decentralization and economic development. World Development 53, 14–25.