The concept of fiscal decentralization, as part of the body of theory of public economics, seeks to determine what level of government should perform what function and how these activities should be funded.
Oates (1972) and Musgrave (1991) suggest that the functions of stabilization and distribution is decentralized, ie, are assigned to the national level.
On the other hand, despite the allocation of goods and services is conducted by the market, there are some who by virtue of their non-rivalry and non- exclusion in consumption (public goods) can only be provided by the government (public sector). However, for a more efficient allocation requires the participation of others in addition to national levels, as these assets are based on the features and coverage of them.
These efficiency gains are also linked to the principle of subsidiarity which states: "whenever feasible, public goods should be provided by the lowest level of government possible, the rule otherwise, alternatively, by the next higher level , the exception "(Macon 2002). The theory also
shows that, at this level, the costs to fund such public goods are more easily assimilated by the taxpayers of the jurisdiction that, when confronted with the costs of alternative levels of service,
demonstrate their preferences by voting for rival political candidates or moving to other sub divisions vote with their feet (Tiebout 1956). In this respect, regional and local public policy can approach the market efficiency in the allocation of local public goods (regional) fixing prices and relying on the local political process (regional) and mobility of citizens to balance the market. Funding for
regional public goods includes three mechanisms: the assignment of own revenue sources, the use of intergovernmental fiscal transfers and the possibility of use of subnational borrowing (Ebel 2000). In the first case, is the decentralization of tax revenue. The theory identifies as potential sub-national taxes to those where the subnational government sets the rate, base, raises and benefits thereof.
Keep in mind two basic principles in setting the subnational financing: firstly, the own revenue sources should, at least in rich jurisdictions, be able to fund from its own tax on the provision public goods that are consumed by residents of the jurisdiction, and second, to the extent possible, subnational taxes should be levied only on residents of the jurisdiction and preferably linked to public goods are provided. In turn, these should take into account three major issues: subnational taxes should not distort the allocation of resources, ensure a subnational tax effort and should not lose sight of the leveling of those jurisdictions that do not meet your needs its own fund spending (Bird 2000).
is known that when the lower levels of government have greater own-source taxation to finance their spending, Government spending tends to be lower and you get greater efficiency (Bird 2000). Also, a true fiscal decentralization implies that subnational governments are financed exclusively from their own taxes and having full autonomy in fiscal management on their network. Therefore, decentralization of public finances, to the extent possible, should exhaust first, a self-financing via taxation, before going to the transfers.
In general, the tax under a decentralized country assumes that subnational jurisdictions should provide public goods at an average level, by financing and exerting an average level of tax collection. However, it is common that there are jurisdictions that are unable to provide an average level of such public goods, so the need to reduce fiscal inequalities. Intergovernmental fiscal transfers are the most common tool used by the national government to close these gaps between income tax and subnational expenditures (Raich 1999). Another factor to use
transfers is the search for allocative efficiency, ie to address interjurisdictional externalities in the allocation of resources, neutralizing the presence of spillovers.
However, excessive dependence on transfers by subnational levels of government occurs, if these were not designed properly, negative effects on subnational fiscal behavior, which discourages fiscal correspondence both as regional tax effort and / or local level. The fiscal correspondence principle is a key element for the decentralization of public finances that it links to subnational expenditures with own sources of revenue.
On the other hand, transfers affect subnational fiscal stress, which leads to a situation known as a common tragedy. In it, subnational governments relax their own revenue, which involves high political costs, and resort transfers as a source of easy revenue. That is, do not cover the full cost of their spending needs, and must be financed with resources from other levels of government and / or resources from other jurisdictions, through fiscal transfers. In broad terms, this affects the general government, as the overall tax burden does not cover general government spending.
So why transfers are used as a mechanism for subnational financing without first exhausting the possibilities of a self-funded? The answer may be associated with intergovernmental transfers in practice they are used simply for political reasons: to ensure control of the Government on the activities of subnational governments. This obviously does not contribute to further efficiency gains through decentralization of public finances.
Progress on political decentralization at the regional level need to be compensated with equivalent tax schemes, that would not only advance the decentralization of public sector but also, primarily, to help improve governance in the regions of the country linking provision of public goods with democratic processes at the subnational level.
Oates (1972) and Musgrave (1991) suggest that the functions of stabilization and distribution is decentralized, ie, are assigned to the national level.
On the other hand, despite the allocation of goods and services is conducted by the market, there are some who by virtue of their non-rivalry and non- exclusion in consumption (public goods) can only be provided by the government (public sector). However, for a more efficient allocation requires the participation of others in addition to national levels, as these assets are based on the features and coverage of them.
These efficiency gains are also linked to the principle of subsidiarity which states: "whenever feasible, public goods should be provided by the lowest level of government possible, the rule otherwise, alternatively, by the next higher level , the exception "(Macon 2002). The theory also
shows that, at this level, the costs to fund such public goods are more easily assimilated by the taxpayers of the jurisdiction that, when confronted with the costs of alternative levels of service,
demonstrate their preferences by voting for rival political candidates or moving to other sub divisions vote with their feet (Tiebout 1956). In this respect, regional and local public policy can approach the market efficiency in the allocation of local public goods (regional) fixing prices and relying on the local political process (regional) and mobility of citizens to balance the market. Funding for
regional public goods includes three mechanisms: the assignment of own revenue sources, the use of intergovernmental fiscal transfers and the possibility of use of subnational borrowing (Ebel 2000). In the first case, is the decentralization of tax revenue. The theory identifies as potential sub-national taxes to those where the subnational government sets the rate, base, raises and benefits thereof.
Keep in mind two basic principles in setting the subnational financing: firstly, the own revenue sources should, at least in rich jurisdictions, be able to fund from its own tax on the provision public goods that are consumed by residents of the jurisdiction, and second, to the extent possible, subnational taxes should be levied only on residents of the jurisdiction and preferably linked to public goods are provided. In turn, these should take into account three major issues: subnational taxes should not distort the allocation of resources, ensure a subnational tax effort and should not lose sight of the leveling of those jurisdictions that do not meet your needs its own fund spending (Bird 2000).
is known that when the lower levels of government have greater own-source taxation to finance their spending, Government spending tends to be lower and you get greater efficiency (Bird 2000). Also, a true fiscal decentralization implies that subnational governments are financed exclusively from their own taxes and having full autonomy in fiscal management on their network. Therefore, decentralization of public finances, to the extent possible, should exhaust first, a self-financing via taxation, before going to the transfers.
In general, the tax under a decentralized country assumes that subnational jurisdictions should provide public goods at an average level, by financing and exerting an average level of tax collection. However, it is common that there are jurisdictions that are unable to provide an average level of such public goods, so the need to reduce fiscal inequalities. Intergovernmental fiscal transfers are the most common tool used by the national government to close these gaps between income tax and subnational expenditures (Raich 1999). Another factor to use
transfers is the search for allocative efficiency, ie to address interjurisdictional externalities in the allocation of resources, neutralizing the presence of spillovers.
However, excessive dependence on transfers by subnational levels of government occurs, if these were not designed properly, negative effects on subnational fiscal behavior, which discourages fiscal correspondence both as regional tax effort and / or local level. The fiscal correspondence principle is a key element for the decentralization of public finances that it links to subnational expenditures with own sources of revenue.
On the other hand, transfers affect subnational fiscal stress, which leads to a situation known as a common tragedy. In it, subnational governments relax their own revenue, which involves high political costs, and resort transfers as a source of easy revenue. That is, do not cover the full cost of their spending needs, and must be financed with resources from other levels of government and / or resources from other jurisdictions, through fiscal transfers. In broad terms, this affects the general government, as the overall tax burden does not cover general government spending.
So why transfers are used as a mechanism for subnational financing without first exhausting the possibilities of a self-funded? The answer may be associated with intergovernmental transfers in practice they are used simply for political reasons: to ensure control of the Government on the activities of subnational governments. This obviously does not contribute to further efficiency gains through decentralization of public finances.
Progress on political decentralization at the regional level need to be compensated with equivalent tax schemes, that would not only advance the decentralization of public sector but also, primarily, to help improve governance in the regions of the country linking provision of public goods with democratic processes at the subnational level.
