文稿分析成果lecture

1、LECTURE 7FISCAL DECENTRALIZATIONWhat is Decentralization?Devolution of various authorities to the lower levels of governmentsFiscal decentralization: Describes a structure of multiple governments with designated taxation and spending responsibilities. Arzaghi and Henderson (2005): “federalism index”

2、Fiscal decentralization increases with:Country population (US, India, Russia, China)Land area GDP/capita: Germany, Spain, Belgium etc.2Decentralization on the rise3Benefits of decentralization:Tiebout modelWhat is it about private markets that guarantees the optimal provision of private goods? Compe

3、tition: Firms selling inferior products dont surviveCentral governments have no competition pressure, and no incentives to provide optimal level of public goods.When public goods are delivered at the local level, competition will naturally arise because individuals will vote with their feet.4Benefit

4、s of decentralization:Tiebout modelCompetition across localities will deliver the efficient level of public goods. Towns that provide inefficient levels will lose populatione.g. People who like high education spending will move to towns providing high level of education spending, and vice-versa. 5Be

5、nefits of decentralization:Tiebout modelFactors affecting the extent to which public goods should be provided at the local level:Economics of scale: Public good with large economies of scale should be provided by the central government. Defense vs. policeLocal governments should provide goods that b

6、enefit all residents, such as roads, so that all residents are willing to pay tax.Welfare payments to low e people should not be provided by local governments, otherwise wealthy residents will leave the town. 6Benefits of decentralizationLocal governments have better access to local information, whi

7、ch allows them to better provide public goods and services.Local governments are incentivized to boost economic growth to increase local tax revenue.7Benefit of centralization:ExternalitiesLocal policies generate externalities to neighboring townsPollution, roads, public park.Local governments will

8、only consider the benefits to local residents. Underprovision/overprovision of public goods Central governments are better at internalizing externalities 8Benefit of centralization:Less tax competitionRace to the bottomIn the EU, countries compete in corporate profits tax rates to attract investment

9、.9Government 2: high taxGovernment 2: low taxGovernment 1: high tax3,31,4Government 1: low tax4,12,2Decentralization around the world10Subnational government spending/revenue as a share of total government spending/revenueSpending %Revenue %Greece5.03.7Portugal12.88.3France18.613.1Norway38.820.3Unit

10、ed States40.040.4Denmark57.834.6OECD Average32.221.9Decentralization in China: Unified system until 1978System of “unified revenue collection and unified spending” (tongshou tongzhi). Generalized tax collection controlled by the central government and then redistributed as needed to the provinces, c

11、ounties, and townshipsNickname: “eating from one big pot” (chi daguofan)11Between 1978 and 19931985: “Fiscal responsibility system”: provincial governments retain a part of tax revenues after the remittance of a fixed sum to the central government1988: “Fiscal contracting system” more stable schemes

12、 in the contracting systemProvinces signed 5 year contracts with central government to give over a share of revenues. Guangdong gave a fixed amount per year during 1980-1987 and then during 1988-1993 an amount that increased by 9% a year. Many governments retained 100 % of local revenue at the margi

13、n. 12Starting in 1994 “Tax sharing system”After 1994, a new tax system was put in place giving local government rights over local taxes.Main objectives of the reform:Raise the share of the central government in total revenueAchieve a more stable fiscal federal system by shifting from ad-hoc negotiat

14、ed transfers to rule-based revenue assignments1314Fiscal decentralization in ChinaCentralSubnationalSharedConsumption taxesProfits from locally owned SOEsVAT (75% central)Taxes on centrally owned SOEsProperty taxStamp tax (97% central)Import related taxesBusiness tax e taxes (60% central)Taxes from

15、financial sectorUrban land use taxSharing of tax revenues 15Fiscal decentralization in ChinaCentralSubnationalSharedNational defenceHealthInfrastructureForeign affairsEducationCulture, scienceSocial welfareExpenditure assignments include 16Degree of decentralization: international comparison17Unifor

16、m tax systemTax rates are set by the central government Same tax rates in all provincesProvincial governments have no power to determine tax rates Other decentralized countries dont have uniform tax systemSpending responsibilities suggest China is highly decentralized. However, the absence of taxati

17、on autonomy reveals a highly centralized system.18Uniform tax systemAdvantage: Limited fiscal competition Disadvantages: Tax yields reflect the dispersion of economic activityProvinces cannot adjust taxation to match their financial needs financial shortfalls19TransfersTransfers are used to bridge t

18、he gap between local expenditures assignments and revenuesAccount for 1/3 of total central government outlays20%revenues*%expendituresCentral3824Province3737Prefecture 817County45(*revenues including extra-budgetary revenues)Transfers:Spending disparitiesTransfers reduce the disparities in expenditu

19、res, but disparities remain largeInequalities between provinces (year 2003):Gini revenues at province level0.42Gini expenditures at province level0.3321Transfers:Spending disparities22Spending disparitiesDisparities across categories of spending at province level (Gini):Capital expenditures 0.5Publi

20、c health 0.37Education 0.34Social relief 0.28Gvt. Administration 0.28Agriculture 0.26Note that 63% of the expenditure disparity across counties are attributable to within-province disparities (between urban and rural areas).23Spending disparities24Financing gapsMismatch between revenue and expenditu

21、res assignments 25Decentralization and economic growth Relationship between GDP growth and decentralization:Control variables: taxation, capital, labor, openness26PositiveNegativeQiao 2008Zhang & Zou 1998Ding 2005Feldstein & Iwata 2005Jin et al. 2005Fiscal incentives Jin, Qian and Weingast (2005)Beh

22、avior of local government towards businesses“Grabbing hand”: restricting productive enterprises and protecting unproductive ones“Helping hand”: support productive enterprises and disciplining unproductive onesWith decentralization, provinces retain a large share of tax revenues. Local governments ar

23、e rewarded if they increase the local revenue tax base27Fiscal incentives Jin, Qian and Weingast (2005)Impact of the higher revenue retention rate of provincial governmentsFaster development of non-SOEs.Greater reform of SOEs, (increases shared of contract workers).Decentralization has incentivized

24、local governments to stimulate economic growth28Fiscal competitionBy setting uniform tax rates, the possibilities of fiscal competition are limited. Fiscal competition is a common problem:United States: States compete in lowering e and business taxation. EU: Countries compete by cutting corporate tax to attract businesses.29Fiscal competition30Fiscal competitionYao and Zhang (2008)Although the official tax is identical across regions, effective rates vary because of difference in local discretional efforts in collecting taxesCounties often engage in a “race to the bottom”: comp