Studies in the Revenue Sources of Local Governments under the Decentralization (in Japanese)

The decentralization of the government authority, or the establishment of local autonomy is one of the most important policy targets in Japan. This problem has lately drawn considerable attention. In this research we aim at the investigations of a appropriate local revenue structure focusing on the intergovernmental fiscal transfers. According to the current data, two-third of the total tax revenue is collected by the central government and one-third of the total government expenditure is conducted by local governments. An imbalance between the tax revenue and expenditure of the local governments shows that there exists the large intergovernmental transfers of financial sources from the central government to the local governments. Local governments receive these intergovernmental revenues so that a policy objective may be accomplished. The most general observation that can be made is that intergovernmental revenue has become essential for most of local governments, except a few that contain metropolitan areas in their jurisdiction. Though intergovernmental revenues can be justified by some reasons such as fiscal equalization among local governments and the redistribution of income from higher-income taxpayers to those who by definition of their eligibility are lower- income, it is also true that they invariably influence the fiscal status of local governments. The central government provides funds for local governments mainly in the shape of the matching grants and unspecified financial resources. In this report, we focus on the matching grants, which play a main role of the central control over local governments. We also focus on the local taxes which support local autonomy as the revenue source. The intergovernmental transfers from the central government to local governments induce a divergence between the benefit from local public goods and local tax burdens of inhabitants. More appropriate resource allocation is achieved when the benefit of public goods coincides with the burden. Thus, resource allocation may be distorted by the intergovernmental transfers. We construct the account of regional fiscal finance to verify the possibility of divergence between the benefit and the burden. This report consists of six chapters. In Chapter 1, we overview current situation and problems of the matching grants, especially grants-in-aid for public works. Our observation shows that the local economy has been increasingly dependent on the central government expenditures such as public investments and agricultural grants-in- aid although a large amount of grants-in-aid had been already allocated to the rural areas for their public works. We conclude that expanding the self-revenue resources of local governments, or replacing the amount of matching grants with the distribution of local transfer taxes is required to achieve more appropriate resource allocation. Chapter 2 clarifies the structure of the matching grants. First, we set the criteria for the evaluation of the grants, such as the rational of subsiding, a starting year, the ratio of subsidies and variations of the amount of grants-in-aid. Then, we list categories of grants-in-aid which should be reconsidered in order to scrap and build. In Chapter 3, we analyze the welfare effects of replacing from the matching grants to the unspecified financial resources by a numerical simulation method. This policy reform will create the welfare gains at the level of 1.8 percent at large to prefectural governments in terms of the welfare index compared to the circumstance in which the reform has not been taken place. The analysis also shows that matching grants for compulsory education and social capital have a tendency to stimulate local governments to their additional expenditures compared with those for social welfare and others. In Chapter 4, we construct the system of regional account and examine benefits and burdens of local public services in each region. We measure the effects on inter-regional redistribution by Atokinson coefficients. The analysis shows that the redistributional effect through the government expenditures has been increasing since the 1980' s. Chapter 5 examines an appropriate local tax system in the era of decentralization from global point of view, based on the analysis using OECD data. It suggests the importance of independent local tax system. In Chapter 6, we summarize all above results and present the policy recommendations to promote the decentralization. Finally, the Keizai Bunseki (The Economic Analysis) is a series issued by the Economic Research Institute of the Economic Planning Agency and contains results of research works by the member of the Institute and the Economic Planning Agency. The purpose of the publication is to promote understanding of the general public about current research works and ideas in the Institute and to ask for any comment on the research results in order to enhance quality of the research activities in the Institute while the works are still not completed. Thus, the views expressed are those of the authors and do not represent those of Economic planning Agency.