Political Determination of Intergovernmental Grants: Evidence from the General Shared Tax in South Korea

Abstract

Intergovernmental transfers can help coordinate resource distribution among local governments to address the disparities between them. Local governments in South Korea heavily rely on general shared tax as an unconditional grant from the central government. Yet, the central government modifies factors and weights in the formula to allocate the grants; thus, the final grants might not always reflect the formula accurately. We aimed to empirically investigate the political influence on the allocation mechanism in practice related to the general shared tax in South Korea. We found that political influence, based on the political ideology of the municipal government chief, which is the same as that of the president, affects the amount of increased general shared tax from the central government. This indicates that the framework for the distribution of resources between different levels of governments is neither efficient nor equitable.