Fiscal Federalism and Political Decentralization

Fiscal Federalism and Political Decentralization

Lessons from Spain, Germany and Canada

Studies in Fiscal Federalism and State–local Finance series

Edited by Núria Bosch and José M. Durán

This book analyzes political decentralization and fiscal federalism in Canada and Germany, both traditional federal countries, and in Spain, a unitarian country engaged in the last two decades in a process of decentralization. Three key issues required for a well designed financing system are analyzed in depth, namely: tax assignment, equalization grants – i.e. redistribution of money from the wealthy regions or the national government to poorer regions, and the role of local governments in the administration of taxes.

Chapter 2: Revenue Assignments in the Practice of Fiscal Decentralization

Jorge Martínez-Vázquez

Subjects: economics and finance, political economy, public finance, politics and public policy, political economy, public policy

Extract

2. Revenue assignments in the practice of fiscal decentralization1 Jorge Martínez-Vázquez 1 INTRODUCTION Over the past two decades there has been an unprecedented move toward decentralized governance all over the world. These changes have taken special significance in many developing and transitional countries where centralized systems were perceived to have failed to deliver improved general welfare. The promise of political, administrative and fiscal decentralization is that it can strengthen democratic representative institutions, increase the overall efficiency of the public sector and lead to improved social and economic welfare for countries that decide to adopt it. One critical assumption in expecting these benefits is that decentralized governments will generally be more accountable and responsive to citizens’ needs and preferences than centralized governments were in the past. At the same time, there is general agreement among experts in decentralization that the increased accountability associated with decentralization can only be assured when sub-national governments have an adequate level of autonomy and discretion in raising their own revenues. Thus, if effective fiscal decentralization requires meaningful revenue autonomy at the regional and local levels of government, the question is, which taxes should be allocated at these levels? This is known in the fiscal decentralization literature as the ‘tax assignment problem’.2 In a chapter like this, which is strictly focused on revenue assignments, it is important to make clear that revenue assignment is just one element in the design of the entire system of government decentralization and that if revenue...

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