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Subnational taxation in developing countries : a review of the literature

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  • Bird, Richard M.

Abstract

This paper reviews the literature on tax assignment in decentralized countries. Ideally, own-source revenues should be sufficient to enable at least the richest subnational governments to finance from their own resources all locally-provided services that primarily benefit local residents. Subnational taxes should also not unduly distort the allocation of resources. Most importantly, to the extent possible subnational governments should be accountable at the margin for financing the expenditures for which they are responsible. Although reality in most countries inevitably falls far short of these ideals, nonetheless there are several taxes that subnational governments in developing countries could use to help ensure that decentralization yields more of the benefits it appears to promise in theory. At the local level, such taxes include property taxes and, especially for larger cities, perhaps also a limited and well-designed local business tax. At the regional level, in addition to taxes on vehicles, governments in some countries may be able to utilize any or all of the following -- a payroll tax; a simple surcharge on the central personal income tax; and a sales tax, in some cases perhaps taking the form of a well-designed regional value-added tax. The"best"package for any particular country or subnational government is likely to be not only context-specific and path-dependent, but also highly sensitive to the balance struck between different political and economic factors and interests.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5450.

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Date of creation: 01 Oct 2010
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Handle: RePEc:wbk:wbrwps:5450

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Keywords: Subnational Economic Development; Public Sector Economics; Taxation&Subsidies; Debt Markets; Public&Municipal Finance;

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  1. Richard M. Bird, 2006. "Taxing Land and Property in Emerging Economies: Raising Revenue...and More?," International Tax Program Papers 0605, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
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Cited by:
  1. Eyraud, Luc & Lusinyan, Lusine, 2013. "Vertical fiscal imbalances and fiscal performance in advanced economies," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 571-587.
  2. Richard M. Bird, 2013. "Below the Salt: Decentralizing Value-Added Taxes," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1302, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Luca Barbone & Richard M. Bird & Jaime Vazquez-Caro, 2012. "The Costs of VAT: A Review of the Literature," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1222, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Paul Smoke, 2013. "Why Theory and Practice are Different: The Gap Between Principles and Reality in Subnational Revenue Systems," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1313, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  5. Richard M. Bird, 2013. "Foreign Advice and Tax Policy in Developing Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1307, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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