OECD Working Papers on Fiscal Federalism

ISSN :
2226-5848 (online)
DOI :
10.1787/22265848
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The Fiscal Federalism Working Paper series covers issues related to intergovernmental fiscal relations and local/regional public finance, such as: tax and spending assignment across government levels; intergovernmental grants; fiscal equalization; local and regional public service efficiency; inter-jurisdictional tax competition; and macroeconomic issues such as intergovernmental fiscal management and sub-central fiscal rules.
Note. Nos 1, 6 and 8 are available in OECD Economics Department Working Papers, as Nos 465, 626 and 705.
 

Taxes and Grants

On the Revenue Mix of Sub-Central Governments You or your institution have access to this content

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Author(s):
Hansjörg Blöchliger1, Oliver Petzold
Author Affiliations
  • 1: OECD, France

Publication Date
18 May 2009
Bibliographic information
No.:
7
Pages
39
DOI
10.1787/5k97b11972bn-en

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This paper analyses trends and driving forces in the revenue composition of sub-central government (SCG). Between 1995 and 2005 the share of SCG in total government spending increased significantly from 31 to 33 percent while the SCG tax share remained stable at around 17 percent, increasing SCG’s dependence on intergovernmental grants. While equal access to public services is the most common justification for such grants, the grant systems of most countries are much larger than required by equalization. Moreover, rather than smoothing out SCG revenue fluctuations over the cycle, grants often tend to exacerbate them. Finally, there is some evidence that grants reduce SCG tax effort, inflate SCG spending and increase SCG deficits and debt. Efficiency and accountability would call for a higher share of SCG spending covered by own taxes. However, that is not easy: increasing property taxes – the most suitable tax for SCG – usually meets with strong resistance. Tax sharing arrangements where central government cedes a part of its income or consumption tax revenue could help lift the SCG tax share without increasing the total tax burden.
Keywords:
fiscal federalism, intergovernmental grants, local taxation
JEL Classification:
  • H42: Public Economics / Publicly Provided Goods / Publicly Provided Private Goods
  • H50: Public Economics / National Government Expenditures and Related Policies / General
  • H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession