Model Of Fiscal Federalism Research Articles

Taming the Leviathan or dismantling democratic government? Evolving political ideas on spontaneous income tax integration in the European Union

AbstractBy the turn of the 1990s, tax competition among national governments had emerged as a powerful law-making practice. The possibility of tax competition essentially depends on the design of transnational law, such as European law. This Article examines the change of economic, political, and legal ideas that have shaped responses by the European Communities and the European Union (EU) to income tax competition. It asserts that under the post-war settlement of embedded liberalism and moderate market integration, tax competition was not perceived as a fully developed phenomenon. Under increased cross-border economic mobility in the 1990s, tax competition became a critical concern but received a liberal and permissive reaction from the EU. In the 2010s, governing tax competition in the EU became a more vital topic. Still, in the contemporary EU, turning political ideas into legal rules capable of addressing tax competition remains hampered by the EU law requirement of unanimous decision-making. The European choice of whether and how to address tax competition involves profoundly contrasting ideas on the means by which to govern the socio-economic reality. The decision between spontaneous and regulated income tax integration is therefore a salient political question, but the unanimity rule undermines political contestation over tax competition and over the European model of fiscal federalism. The Article comes to a close by reflecting on whether the EU legal order offers means to overcome the deadlock of unanimity and whether it could accommodate a more properly political contestation over the Europeanisation of income taxation.

Does Fiscal Decentralization Matter for Economic Development? Case of the Czechia

Economic growth and performance is influenced by a number of internal and external factors. The goal of the article is to explore the relationship between fiscal decentralization and economic development in the Czechia in the years 2000-2020. The article deals with territorial arrangement as the Czechia belongs to countries with the highest territorial fragmentation of municipalities and applies a combined model of fiscal federalism with relatively low fiscal decentralization.

Does intermunicipal cooperation favor higher firm creation? French evidence from a natural experiment

This paper investigates whether the increasing cooperation between municipalities in the 2000s in France favored firm creation and what type of intermunicipal cooperation was more effective. Results first show that a higher share of municipalities involved in cooperation is a significant and positive driver of firm creation. Second, results indicate that to favor firm creation, intermunicipal governments must rely on business tax sharing. Our findings are in line with first and second-generation models of fiscal federalism. Indeed, the lower tax competition is probably key to make fiscal integration conducive to firm creation. And local governments are more likely to provide market-enhancing public goods when they face the relevant fiscal incentives. Finally, we suggest that the two goals of the 1999 law (increased cooperation between urban municipalities and business tax-based sharing) were effective in boosting firm creation in the 2000s.

Exploring the Sub-state Intergovernmental Game

AbstractThis paper presents a model of fiscal federalism where state and local officials jointly fund a local public good that produces regional externalities. The model examines the implications of diverging budgetary priorities at the state and local level for the sustainability of cooperative funding arrangements. Local government dependence on intergovernmental aid is shown to negatively affect the likelihood of receiving state bailouts. Additionally, the termination of joint funding agreements is predicted to precede increased government fragmentation through the formation of new special purpose districts. The analysis is illustrated using flood control infrastructure finance and school district fragmentation.

Еволюційна парадигма фіскального федералізму: трансформація досвіду США в український децентралізм

The modern paradigm of effective social and economic development of regions must take into consideration the dialectics of fiscal federalism in the symbiosis of its essential determinants with fiscal decentralization. The purpose of the article is to scientifically and conceptually substantiate the model of fiscal federalism of the United States of America in the field of implementation of adequate provisions into Ukrainian decentralization. The article examines the conceptual provisions of fiscal federalism, substantiates the forms of decentralization of powers among levels of government. The architectonics and evolutionary paradigm of fiscal federalism in the United States of America are covered. The risks and effects of fiscal federalism were monitored for the purposes of implementing its basic aspects into Ukrainian practice. Theories of the first and second generations of fiscal federalism are considered. It is ascertained, that the principles of fiscal federalism are used in the practice of unitary countries. Public authorities actively apply mechanisms of cooperation with municipalities in the context of delegation of tax and expenditure powers. Emphasis is placed on the tax component of the intensification of fiscal autonomy of local governments. At the same time, the experience of the United States of America has shown the importance of directing grants and transfers to social projects of municipalities. The priorities of adaptation of actual postulates of fiscal federalism into Ukrainian system of interbudgetary relations under conditions of decentralization of powers are outlined. It is emphasized that fiscal federalism should not be limited to the redistribution of financial resources between the State and local governments. It should encourage amalgamated territorial hromadas to financial autonomy and increase tax potential to improve the prosperity of citizens

Government market power and public goods provision in a federation

In standard models of fiscal federalism, tax competition among subnational jurisdictions depresses government expenditures. Centralization therefore increases government spending, assuming that both local and central governments are price takers in the market for public goods. If the central government has greater market power than constituent jurisdictions, then centralization may be associated with reduced government spending. Whether centralization or decentralization provides more public goods depends on the relative strengths of tax competition and market power. In an illustrative example, decentralized public goods spending can range from 25 to 120% of centralized spending.

Federalizing benefits: The introduction of Supplemental Security Income and the size of the safety net

In 1974, Supplemental Security Income (SSI) federalized cash welfare programs for the elderly, blind, and individuals with disabilities, imposing a national minimum benefit, and differentially raising payment levels in states that paid below its benefit floor. We show that this increased disability participation, but shrank non-disability cash transfer programs. For every four new SSI recipients, three came from other welfare programs. Each dollar of per capita SSI income increased total per capita transfer income by just over 50 cents. Federalizing part of a patchwork safety net need not increase redistribution by as much as traditional models of fiscal federalism suggest.

The Constitutional Principle of Uniform Economic Area and Centralization of Public Finance in the Russian Federation: Analysis of the Russian Federation Constitutional Court’s Rulings

The paper is devoted to the issue of centralization in public finance in Russia, and highlights one of the problems of interpretation of the Russian Constitution clauses. The Rulings of the Russian Federation Constitutional Court from the period 1997–2006 created legal grounds for the process of centralization and reduction of the regional powers regarding budgeting and taxation. But all arguments of the Court are debatable. Wherein, the centralization is justified by the constitutional principle of uniform economic area. The author argues that the Russian Constitution does not have clauses establishing the uniform budget and tax systems directly, and any model of intergovernmental relations might comply with the Russian Constitution. Uniformity of economic area does not imply uniformity in taxation and budgeting in the sense of sameness. Study of foreign practices shows different approaches to the understanding of uniformity in economy, and in taxation and budgeting. The contemporary Russian public finance law is formed under the influence of the Constitutional Court’s legal positions, and the process of centralization is still evolving. The Russian history of intergovernmental relations (1991–1997) shows another model of fiscal federalism – the decentralized federalism. Replacement of the fiscal federalism models is determined by the political considerations, not by constitutional requirements.

The Constitutional Principle of Uniform Economic Area and Centralization of Public Finance in the Russian Federation: Analysis of the Russian Federation Constitutional Court’s Rulings

The paper is devoted to the issue of centralization in public finance in Russia, and highlights one of the problems of interpretation of the Russian Constitution clauses. The Rulings of the Russian Federation Constitutional Court from the period 1997–2006 created legal grounds for the process of centralization and reduction of the regional powers regarding budgeting and taxation. But all arguments of the Court are debatable. Wherein, the centralization is justified by the constitutional principle of uniform economic area. The author argues that the Russian Constitution does not have clauses establishing the uniform budget and tax systems directly, and any model of intergovernmental relations might comply with the Russian Constitution. Uniformity of economic area does not imply uniformity in taxation and budgeting in the sense of sameness. Study of foreign practices shows different approaches to the understanding of uniformity in economy, and in taxation and budgeting. The contemporary Russian public finance law is formed under the influence of the Constitutional Court’s legal positions, and the process of centralization is still evolving. The Russian history of intergovernmental relations (1991–1997) shows another model of fiscal federalism – the decentralized federalism. Replacement of the fiscal federalism models is determined by the political considerations, not by constitutional requirements.

The impact of models of fiscal federalism on the taxable capacity level of Russian regions

The impact of models of fiscal federalism on the taxable capacity level of Russian regions

Does tax competition tame the Leviathan?

We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these effects. While for purely direct-democratic jurisdictions (which we associate with relatively benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating effect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare improving by constraining the scope for public-sector revenue maximization.

Модель бюджетного федерализма Индии: сходство и различия с Россией

The article compares the Indian and Russian models of fiscal federalism and defines main similarities and differences of these models. It also considers the types of intergovernmental fiscal transfers in each country and draws conclusions about the inter-country differences in their provision. The authors determined that not only intergovernmental fiscal transfers, but also revenues from the state taxes share in the tax revenues of the central government play an important role in the revenue side of the state budgets.

The determinants of budget revenues of Russian regions

This paper discusses the determinants of regional budget revenues and evaluates their impact on the level of budget provision of Russian regions. We used the panel data on 80 Russian regions in 2006-2014 embracing average population, GRP disaggregated by main economic activities, tax revenues both collected and allocated at the regional level, intergovernmental aid and total budget revenues of consolidated budgets. We applied the least-squares methods with fixed and random effects to estimate the regressions between the structure of employment in main economic activities and the collected tax revenues in Russian regions. The constructed model allowed us to distinguish activities with positive and negative influence of employment on the general tax level and to determine the elasticity of the collected tax revenue per capita with respect to the shares of employees engaged in various economic activities. Further we applied the weighted least-squares method to estimate the model, demonstrating dependency of the budget revenue per capita in Russian regions on the collected tax revenue per capita, the level of tax absorption and the share of intergovernmental transfers in consolidated regional budgets. The constructed model demonstrated high elasticity of budget provision of Russian regions with respect to the general tax level, and even more with respect to the level of tax absorption. Nevertheless, the inter-budgetary transfers showed a very slight positive impact on the dispersion of the regional budget revenue per capita over the given period. Our findings are applicable to the management of budget revenues at the regional level and to the improvement of the Russian model of fiscal federalism.

A New Perspective for Fiscal Federalism: The NK Model

:Economic models of fiscal federalism, according to different settings, are generally linear and static, offering unique and deterministic solutions starting with simplifying assumptions. This article stems from the idea of investigating how decision-makers, abandoning their traditional economic models and focusing on innovative components of evolutionary economics instead, can achieve better performance results in organizing and optimizing an economic system based on fiscal federalism. For this purpose, fiscal federalism must be understood as a dense network of economic relationships between different complex adaptive and co-evolving systems, the jurisdictions, linked by strong interdependencies. A better understanding of the links between interdependence will be provided by Stuart Kauffman’s NK model. The relevance of the NK model in the study of economic organizations has been noted in the relevant literature. This literature, however, neglects the problem of co-evolution, which underpins our article.

‘Obligations of good faith’: on the difficulties of building US-style EU federalism

The sovereign debt crisis has exposed the weaknesses of the regulative and institutional arrangements of the European Monetary Union. A number of American scholars have highlighted that there are lessons on federalism for Europe to learn from the USA. But to what extent can the US model of fiscal federalism be transferred to the European context? Our general assumption is that besides the differences of the historically developed institutions, structures and economic concepts, it is the different logic that has and is driving the two integration processes that would impede such a transfer. Basing the argument on Oates’ theory of two generations of fiscal federalism, we see that the USA – building on a firm constitutional framework – provided for a crucial role of central government in macro-economic stabilization, whereas the European Union (EU) style of fiscal federalism remains contractual. Although transfers are inevitable, the EU shuns the logic of financial solidarity as economic divergencies cannot be harmoniously accommodated by a commitment to a common constitutional framework. As crisis management largely relies on an intergovernmental decision-making process, it enhances the power of creditor states vis-à-vis the debtor states and follows the logic of ‘surveillance and punishment’. The European emphasis is on controlling the moral hazard and the most likely outcome of the crisis will be differentiated integration.

‘If You Want Me to Stay, Pay’: A Model of Asymmetric Federalism in Centralised Countries

Highly centralised countries like Italy and Spain have devolved fiscal power to regions in an asymmetric way. Some well-off regions get transfers that turn them into net recipients of the fiscal system. We demonstrate in a political economy model of fiscal federalism that, in centralised countries, side-payments are used to compensate regions that are set back by the fiscal system and can credibly threaten to secede. Compensation blocks political negotiation on alternative—more efficient—fiscal systems. We study two regions, Valle d'Aosta in Italy and País Vasco in Spain, as an example.

Transforming the System with One Small Change? An Idea for Debate.

Gardner, Levy and Fierlbeck offer a thought-provoking plan for turning Canada's currently unproductive and obstructive model of fiscal federalism into an effective tool for leveraging substantive change in the country's healthcare systems and enhancing their ability to provide effective care at acceptable cost. However, what is presented as a straightforward solution actually requires a complicated and highly demanding set of interlocking transformations. The author of this commentary is not convinced that these can all be achieved within a politically realistic timeframe and without significant new resources.

Decentralization in Developing Economies

Standard models of fiscal federalism suggest many benefits of decentralization in developing economies, and there has been a recent push toward decentralization around the world. However, developing countries presently still have less decentralization, particularly on the revenue side, than both developed countries today and the United States and Europe historically. We consider how the trade-offs associated with fiscal federalism apply in developing countries and discuss reasons for their relatively low levels of decentralization. We also consider additional features relevant to federalism in developing economies, such as the prevalence of nongovernmental organizations and the role of social incentives in policy design.

On Federalism and Government Size The Leviathan Hypothesis After Three Decades

The impact of fiscal federalism on the size of governments has been the subject of an intense (and extended) debate for more than three decades, mainly under the influence of The Power To Tax by Geoffrey Brennan -James Buchanan [1980] where federalism was proposed as a component of a fiscal constitution. According to the Brennan-Buchanan hypothesis, intergovernmental competition (if made effective through a number of conditions, such as free mobility of goods and persons, decentralization of taxes and expenditures) should indirectly ‘constrain’ the power to tax of the government (i.e., in Hobbesian terms, the Leviathan) just as the direct limits of a fiscal constitution. However, more than thirty years later, the numerous empirical investigations, though quite sophisticated, have been unable, at least apparently, to prove (or to disprove) irrefutably Brennan-Buchanan's hypothesis about the effects of federalism, so that quite often the authors of these inquiries recognized that their results are ‘mixed’. This paper will show that those empirical investigations did not take into consideration the basic conditions on which die approach of Brennan and Buchanan was based and, in particular, die new model of federalism proposed by Brennan and Buchanan, compared with the orthodox (‘conventional’, according to B-B) model of federalism. In fact, all these investigations made use of data on existing (orthodox) models of fiscal federalism, without taking account of the innovative conditions required by Brennan and Buchanan for establishing a new model of federalism capable to contract the public sector.

Il dibattito sul federalismo fiscale in Italia tra la riforma tributaria degli anni Settanta e la riforma amministrativa degli anni Novanta

This paper analyses the scientific and institutional debate on fiscal federalism that took place in Italy in the period between the early Seventies and the early Nineties, when the traditional approach was confronted with the new public choice one, in the context of the changing views on the role of the state. The issue is studied within the set of constraints and opportunities deriving from the European integration process. The proposals put forth in the early Nineties exemplify the emerging model of fiscal federalism both for Europe and for Italy.