Chapter 8 – Maintaining taxes at the centre despite decentralization: Interactions with national reforms

Giorgio Brosio *,  Juan Pablo Jiménez **


Abstract

Local taxes might be expected to increase during decentralization processes, but this is often not the case. Taxation centralization may accompany policy and expenditure decentralization when national tax reforms, which are concomitant with decentralization processes, can pre-empt the space for local taxes; or because reliance by subnational governments on transfers from the central government looks more attractive to local politicians. This paper analyses these issues as a negotiation between central and subnational governments, focusing on the expenditure side of the budget. Decisions about (de)centralization of taxes are related to decisions and prospects about the uses of tax revenues. We first discuss the meaning of tax centralization and provide a review of the literature. We then discuss how efficiency gains in tax administration and electoral accountability for services provided locally can interact to produce decentralized expenditures and centralized taxation. These ideas are tested against evidence from Italy, Argentina, Bolivia and Canada and find support in the first two.

*Dipartimento di Economia, Università di Torino, giorgio.brosio@unito.it

**CEPAL, Santiago de Chile, JuanPablo.JIMENEZ@cepal.org

Paper prepared for insertion in the volume “Is decentralization good for development? Perspectives from Academics and Policy Makers”,  edited by Jean-Paul Faguet and Caroline Pöschl. The paper was started   during the stay of Juan Pablo Jiménez at International Center of Economic Research (ICER) in Torino between September-November 2010. Both authors express their gratitude to ICER for facilitating their joint work.


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