Financing multi-level government

The topic of multi-level taxation is currently highly relevant to two issues – European tax harmonisation and local government taxation in the UK. This paper presents a general economic analysis of multi-level government and taxation and the characteristics that might make a particular tax appropriate as a regional or local tax. In applying this analysis to European tax harmonisation it is clear that there is little harmony in the meaning of the term and a classification is presented. The main driving force for EU tax harmonisation has been the promotion of economic efficiency in the form of free trade in order to achieve the establishment and functioning of the European internal market. Differing regional needs and preferences regarding public sector expenditure and taxation may not always be properly recognised. It is suggested that a greater emphasis be placed on equity as an economic criteria in developing European tax harmonisation. Applying the analysis specifically to local government in the UK, it is clear that taxes on property meet most of the criteria relating both to taxes in general and lower level taxes in particular. However as in the case of European tax harmonisation, there seems to have been insufficient account taken of matters of equity as compared to economic efficiency. It has been the issue of equity that caused the demise of local authority domestic rates and the community charge in turn and continues to raise difficulties with the present council tax. It is therefore suggested that coverage of the income tax feature of council tax – council tax rebates – be extended. The experience to date suggests equity as well as economic efficiency is important in the successful development of both European tax harmonisation and UK local government finance and perhaps should be given greater prominence in the development of systems of multi-level taxation more generally.