Fiscal federalism : dimensions of tax reform in developing countries
AbstractThe authors propose four economic principles for use in deciding taxing responsibilities for various levels of government. These are: 1) efficiency of the internal common market - for efficiency in internal common market, taxes on mobile factors and tradable goods should either be assigned to the national government or coordinated among subnational governments; 2) national equity - progressive redistributive taxes ought to be assigned to the level of government having responsibility for redistribution, usually the national government. Subnational governments could levy supplementary flat rates on the federal tax base; 3) administrative costs - to minimize collection, administration, and compliance costs, a tax should be assigned to the level likely to be best informed about its base. This suggests assigning real property taxation to local governments and corporate income taxation to the national government; and 4) fiscal need - to ensure accountability, revenue means should be matched as closely as possible to revenue needs. Thus tax instruments intended to further specific policy objectives should be assigned to the level of government having the responsibility for such a service. Thus progressive redistributive taxes, stabilization instruments, and resource rent taxes would be suitable for assignment to national government; while tolls on intermunicipal roads are suitably assigned to state governments. Some resource taxes, such as royalties and fees and severance taxes on production and/or output, are designed to cover costs of local service provision and could be assigned to subnational governments. In addition, subnational governments could also impose taxes to discourage local environmental degradation. In countries with a federal level VAT, it may be too cumbersome to have subnational sales taxes. In such circumstances, the fiscal need criterion would suggest allowing subnational governments access to taxes which are traditionally regarded as suitable for national administration, such as personal income taxes. The authors also stress the importance of tax harmonization and coordination in preserving internal common market, reducing collection and compliance costs and helping to achieve national equity objectives and suggest methods of achieving such coordination vertically (between the federal and subnational governments) and horizontally (among subnational governments).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1385.
Date of creation: 30 Nov 1994
Date of revision:
Municipal Financial Management; Public Sector Economics&Finance; National Governance; Banks&Banking Reform; Environmental Economics&Policies;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shah, Anwar & Whalley, John, 1991. "Tax Incidence Analysis of Developing Countries: An Alternative View," World Bank Economic Review, World Bank Group, World Bank Group, vol. 5(3), pages 535-52, September.
- Shah, Anwar, 1991. "Perspectives on the design of intergovernmental fiscal relations," Policy Research Working Paper Series 726, The World Bank.
- Boadway, Robin & Roberts, Sandra & Shah, Anwar, 1994. "The reform of fiscal systems in developing and emerging market economies : a federalism perspective," Policy Research Working Paper Series 1259, The World Bank.
- Tugrul Gurgur & Anwar Shah, 2008.
"Localization and corruption: panacea or pandora's box?,"
CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics
581, China Economics and Management Academy, Central University of Finance and Economics.
- Tugrul Gurgur & Anwar Shah, 2014. "Localization and corruption: panacea or pandora's box?," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 109-136, May.
- Gurgur, Tugrul & Shah, Anwar, 2005. "Localization and corruption : panacea or pandora's box?," Policy Research Working Paper Series 3486, The World Bank.
- Susan Steiner, 2005.
"Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact,"
GIGA Working Paper Series
03, GIGA German Institute of Global and Area Studies.
- Susan Steiner, 2005. "Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact," Public Economics, EconWPA 0508006, EconWPA.
- Raghbendra Jha, 2007. "Fiscal Policy in Developing Countries: A Synoptic View," ASARC Working Papers, The Australian National University, Australia South Asia Research Centre 2007-01, The Australian National University, Australia South Asia Research Centre.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.