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Fiscal Decentralization and Local Finance in Developing Countries

Development from Below

Roy Bahl and Richard M. Bird

This book draws on experiences in developing countries to bridge the gap between the conventional textbook treatment of fiscal decentralization and the actual practice of subnational government finance. The extensive literature about the theory and practice is surveyed and longstanding problems and new questions are addressed. It focuses on the key choices that must be made in decentralizing, on how economic and political factors shape the choices that countries make, and on how, by paying more attention to the need for a more comprehensive approach and the critical connections between different components of decentralization reform, everyone involved might get more for their money.
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Chapter 5: Financing local and regional government

Development from Below

Roy Bahl and Richard M. Bird

Extract

This chapter sets out a simple framework explaining why and how to impose a hard budget constraint on subnational governments; explores the opportunities for financing local budgets with local sources; and reviews practices in low- and middle-income countries. Noting that the scope of decentralized taxes is usually limited, we then review theoretical and other reasons for limiting the extent to which tax authority is assigned to local and regional governments. The merits of centralized vs decentralized tax administration are analyzed, as are some possible new candidates for subnational government taxes, with particular attention on some relatively successful experiences with broad-based sales taxes.

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