Taxes and Grants: On the Revenue Mix of Sub-Central Governments
AbstractThis paper analyses trends and driving forces in the revenue composition of sub-central government (SCG). Between 1995 and 2005 the share of SCG in total government spending increased significantly from 31 to 33 percent while the SCG tax share remained stable at around 17 percent, increasing SCG’s dependence on intergovernmental grants. While equal access to public services is the most common justification for such grants, the grant systems of most countries are much larger than required by equalization. Moreover, rather than smoothing out SCG revenue fluctuations over the cycle, grants often tend to exacerbate them. Finally, there is some evidence that grants reduce SCG tax effort, inflate SCG spending and increase SCG deficits and debt. Efficiency and accountability would call for a higher share of SCG spending covered by own taxes. However, that is not easy: increasing property taxes – the most suitable tax for SCG – usually meets with strong resistance. Tax sharing arrangements where central government cedes a part of its income or consumption tax revenue could help lift the SCG tax share without increasing the total tax burden.
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Bibliographic InfoPaper provided by OECD Publishing in its series OECD Working Papers on Fiscal Federalism with number 7.
Date of creation: 18 May 2009
Date of revision:
local taxation; fiscal federalism; intergovernmental grants;
Find related papers by JEL classification:
- H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
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