A model of Russian local public finance and social asset divestiture

The division of tax revenues between the federal, regional and local layers of government of the Russian Federation has undergone continuous reform and thus received a lot of attention both in the public discussion and in the related research on fiscal federalism. Another important unsettled issue of property rights in the country is the absence of market for land and its implications to the tax structure. A third and often overlooked phenomenon is the participation of industrial firms in infrastructure and social service provision. Despite a massive transfer of social assets to the public sector, firms still participate in these activities to some extent, in many cases receiving benefits from the government for doing this. In earlier research, the fact that the industrial firms might still produce public goods has not received much attention. In this paper, we analyse the issue of public good production by looking at the implications of the non-existence of property rights over land and the absence of land markets through an optimal local public finance model. We first introduce the possibility that the industrial firms in a certain locality may take part in public goods provision. Second, we prove that when the land distribution is given, it may be beneficial to levy a turnover tax on the firms and redistribute (part) of the housing stock to the public sector.