Does Fiscal Decentralization Promote Fiscal Discipline?

We investigate the efficiency and equity implications of a redistributive rule that takes into account both local tax collection efforts and deviation of local incomes from respective targets under alternative fiscal mechanisms. We show that, if the general budget constraint is binding, the proposed...

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Bibliographic Details
Published in:Emerging markets finance & trade 2016-03, Vol.52 (3), p.690-705
Main Authors: Akin, Zafer, Bulut-Cevik, Zeynep B., Neyapti, Bilin
Format: Article
Language:English
Subjects:
Decentralization
Equity
fiscal decentralization
fiscal discipline
Fiscal policy
Income distribution
Income redistribution
redistribution
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Tax collections
Taxation economics
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Summary:We investigate the efficiency and equity implications of a redistributive rule that takes into account both local tax collection efforts and deviation of local incomes from respective targets under alternative fiscal mechanisms. We show that, if the general budget constraint is binding, the proposed transfer rule leads to higher fiscal discipline under fiscal decentralization (FD) than under centralized redistribution. Although the centralized decision yields better income distribution than FD, FD also improves income distribution unambiguously when equalization across regions is targeted explicitly. When localities act strategically, the private sector's utility weight enhances the disciplinary effect of decentralization.
ISSN:1540-496X
1558-0938
DOI:10.1080/1540496X.2015.1012920