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Taxes or Grants: What Revenue Source for Sub-Central Governments?

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Author Info
Hansjörg Blöchliger
Oliver Petzold

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Abstract

This paper analyses trends in and driving forces of the revenue composition of sub-central governments (SCG). Between 1995 and 2005 the share of SCG in total government spending increased from 31 to 33%, while the SCG tax share remained stable at around 17%, 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 raising effort, inflate SCG spending and increase SCG deficits and debt. The economic crisis will both sharply reduce SCG’s own tax revenues and – via budget constraints at the central level – increase pressure on the grant system. The crisis could hence help rethink the SCG revenue mix, their tax structure and the size and design of intergovernmental transfers.

Impôts ou transferts : quels revenus pour les administrations infranationales ?
Ce document analyse les tendances et les déterminants de la composition des revenus des administrations infra-nationales (AI). Entre 1995 et 2005, la part des dépenses des AI dans les dépenses publiques totales a augmenté de 31 à 33%, alors que leur participation aux recettes fiscales restait stable autour de 17%, accentuant de ce fait la dépendance des AI envers les transferts intergouvernementaux. Bien que l’égalité d’accès aux services publics soit la raison la plus souvent invoquée pour justifier ces transferts, les systèmes de transferts sont en réalité souvent bien plus importants que ceux qu’impliquerait la simple péréquation. Par ailleurs, les transferts ont tendance à amplifier plutôt qu’à réduire les fluctuations de revenus au cours du cycle. Finalement, il semblerait que les transferts réduisent l’effort fiscal des AI tout en augmentant leurs dépenses et donc leurs déficits et leur dette. La crise économique en cours à la fois va réduire fortement les impôts propres des AI et – suite aux contraintes budgétaires au niveau central – augmenter la pression sur le système des transferts. La crise pourrait donc inciter à repenser la composition des revenues des AI, la structure de leurs impôts et la taille et le design des transferts intergouvernementaux.

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Paper provided by OECD, Economics Department in its series OECD Economics Department Working Papers with number 706.

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Date of creation: 03 Jul 2009
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Handle: RePEc:oec:ecoaaa:706-en

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Related research
Keywords: fiscal federalism; intergovernmental grants; local tax system; fédéralisme fiscal; impôts locaux; transferts intergouvernementaux;

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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This page was last updated on 2009-11-23.

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