Taxation and Development: The Weakest Link?

Taxation and Development: The Weakest Link?

Essays in Honor of Roy Bahl

Studies in Fiscal Federalism and State–local Finance series

Edited by Richard M. Bird and Jorge Martinez-Vazquez

Taxation and Development highlights the importance of better understanding the ways in which taxes and expenditure are linked. Focusing on developing countries, the book argues for a broader approach to the topic, with a secondary focus on developing and applying new modeling techniques to country-specific data.

Chapter 11: Beneficiary charges: The Cinderella of subnational finance

Yeti Nisha Madhoo and Shyam Nath

Subjects: economics and finance, development economics, public finance, public sector economics


A comprehensive literature on the benefit principle and the ability to pay principle of taxation starts with Musgrave (1959). Olson (1969) instead stressed the importance of the ‘principle of fiscal equivalence’ in strongly linking expenditures to taxes in order to give rise to a greater degree of fiscal accountability. Olson’s treatment of taxes and expenditures seems to imply that expenditures are a cost of providing a public service and taxes and charges are prices that the consumer-taxpayer pays to the government. A strong case is also made for benefit taxes and charges in the Tiebout (1956) model in which citizen taxpayers shop for localities and choose their residence along with a tax-expenditure package. Beneficiary charges are used to raise financial resources by governments at different levels. These revenue sources comprise fees, fines and user charges for public administrative services and the sale of public utility products such as water and sewerage services. In some cases, their proceeds are combined with data on non-tax revenues in government budgets. Local governments depend on beneficiary charges to meet part of the cost of delivering such community-based local public services as street lighting, water and sewerage services, municipal road maintenance, management of municipal markets and buildings, public education and primary health. Until the recent episodes of globalization and privatization, the significance of market efficiency and off-budget supply of local services was little recognized and benefit-based charges were largely ignored.

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