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Fiscal federalism : dimensions of tax reform in developing countries


  • Boadway, Robin
  • Roberts, Sandra
  • Shah, Anwar


The 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).

Suggested Citation

  • Boadway, Robin & Roberts, Sandra & Shah, Anwar, 1994. "Fiscal federalism : dimensions of tax reform in developing countries," Policy Research Working Paper Series 1385, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1385

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    References listed on IDEAS

    1. Shah, Anwar, 1991. "Perspectives on the design of intergovernmental fiscal relations," Policy Research Working Paper Series 726, The World Bank.
    2. Shah, Anwar & Whalley, John, 1991. "Tax Incidence Analysis of Developing Countries: An Alternative View," World Bank Economic Review, World Bank Group, vol. 5(3), pages 535-552, September.
    3. 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.
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    Cited by:

    1. Susan Steiner, 2005. "Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact," Public Economics 0508006, EconWPA.
    2. Raghbendra Jha, 2007. "Fiscal Policy in Developing Countries: A Synoptic View," ASARC Working Papers 2007-01, The Australian National University, Australia South Asia Research Centre.
    3. 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.


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