Factors of Tax Decentralization in OECD-Europe Countries

Milan Jílek

doi:10.18267/j.efaj.140

Abstract

The article deals with the issue of tax decentralization to local government. The aim of the article is to describe the tax decentralization to local governments with respect to its possible determinants and to verify empirically the relevancy of theoretical factors generally explaining fiscal decentralization to the tax decentralization. The analysis is based on data panel of OECD-European covering the period of 1995 to 2013. Upon these data we build panel regression model. Estimated equations provide support for the hypotheses that the countries with larger geographical area tend to decentralize more tax revenue to local governments. Surprisingly, the slope parameters of population and population density have negative sign and are statistically significant. The real GDP per capita proved to be a significant factor of tax decentralization. The inequality of household income, as well as the share of urban population, although having correct sign, is not statistically significant. The size of redistribution function is highly statistically significant, suggesting that countries with higher redistribution decentralize more taxes to local government. The heterogeneity variable showed results with correct sign, where religious and language fractionalization were statistically significant. The very fact that the country is or is not federated or belong or not to group of Central and Eastern European Country seems to be unimportant for tax decentralization to local government level.

Highlights

The issue of centralization and decentralization of government and public finance has been an important and frequent topic of economic and political discussions
Because the above mentioned ratio does not reveal the autonomy of local government to influent the main parameters of taxation, we introduce the tax autonomy ratio (TA), which is the share of local government revenue with local government tax autonomy (TLG(a,b,c) ) on total local government tax revenue (TLG)
Since we focus on local government only, omitting state level in federations, the explanation lies in the fact that the local government levels in unitary states perform similar task as state levels government in federations, especially considering small European federations

Summary

Introduction

The issue of centralization and decentralization of government and public finance has been an important and frequent topic of economic and political discussions. Decentralized taxation of highly mobile tax bases is the cause of differences in net benefits (Oates, 1999, Gramlich, 1993) and of fiscal externalities (Boadway et al, 2003) Both factors significantly limit the possibility of tax decentralization. Olson (1969) and Tullock (1969) defined the fiscal equivalence related to the local government unit Their contribution is very important for the use of non-benefit taxes to finance local governments. The results of theoretical and empirical studies can be summarized in the following way: It is widely accepted that the relation of expenditure and tax autonomy of local government is beneficial for the effective provision of local public goods. Focus the analysis on the revenue or even tax decentralization (Bodman and Hodge, 2010, Stegarescu, 2005, Cerniglia, 2003)

Empirical Approach

Tax decentralization in OECD-Europe countries – an overview

The model specification and estimation

Conclusion