Issues in Decentralization

• Pages: 398

Page 398

An important and perhaps overriding reason for countries to embark on fiscal decentralization is to improve economic efficiency and budget discipline. Success in achieving these goals is often rooted in the ability to clearly assign revenues, expenditures, and transfers to the various levels of government in a rational, predictable, and enforceable manner. If the benefits are chiefly local-for example, for street lighting-it is both efficient and politically prudent to collect revenues and expend resources locally for that public good. Policies with national ramifications, such as macroeconomic stability or redistributive functions, are by extension best carried out by central governments.

In a decentralized fiscal system, it is essential for a central government to retain taxing powers consistent with its macroeconomic responsibilities. Lower levels of government should have well-defined authority to set tax rates, Arora and Norregaard note, but should not have the power to define tax bases. Ideally, local taxes should also not rely on a tax base that is mobile or unevenly distributed across jurisdictions. The impact of local taxes should be tangible at the local level, and their level should be sufficient to meet local needs. Property taxes and sales and excise taxes on the...