Fiscal Federalism and International Public Finance: A Comprehensive Overview

Posted on Aug 29, 2024 in Economy

1. Fiscal Federalism

a) Overview of Fiscal Federalism

Justification: Since prosecution necessarily falls within the limits of a territory, each function (allocation, distribution, stability, and development) must be analyzed in its specific spatial context. Therefore, it is necessary to study and adjust the economic and financial relations of the different levels of government that exist in the states. This aims to achieve equity and/or efficiency in the allocation of resources with spatial reference to the field of inter-regional transfers. The two relevant disciplines are local public economics and fiscal federalism.

The fundamental difference between them is that local public economics addresses the economic relationships of communities within the same range where the courts are not subject to hierarchical links. Fiscal federalism deals with these relationships as well as the horizontal and vertical relationships between communities of different levels of government where the courts are subject to hierarchical links.

Focusing on fiscal federalism, the Tiebout model aims to determine the optimal level of decentralization to determine which public goods should be provided by sub-national territorial levels.

b) The Different Levels of the Treasury: Fundamentals

Historical and Political: The historical reason fiscal federalism arises is that modern nations emerge as a combination of existing jurisdictions. However, in some cases, some jurisdictions maintain their prerogatives differently – in nature. For example, those territories for which there are specific rules in the tax area.

Economic: In the area of public goods, the optimal jurisdiction does not always coincide with the national territory since economies of scale can occur according to the nature of public goods. Those assets that have large economies of scale should be provided by the national level, as is the case with national defense. However, those goods with reduced economies of scale, such as police and citizen protection, should be left to local jurisdiction. This is the third factor in the Tiebout model for determining the optimal decentralization level.

The decentralization of services provides insight into the demands of citizens. The theory of tax-benefit linkages provides that residents should see a direct equivalence between the payments they make to their level of government and the goods they receive from it. This is the second factor that determines the optimal level of decentralization along the lines of Tiebout. If we know where those taxes are spent, we are less reluctant to pay taxes.

The increased capacity of governments to respond to the aspirations for cultural identity, social or determine its own policy on the transferability of public goods to different geographical areas. Moreover, greater diversity within the territory allows a choice between different territorial levels.

Social goods supplied in one area can generate external effects in other territories. The existence of externalities that span these areas are called spillovers in the provision of public goods. Given the existence of these spillovers, the optimal level of government will be marked by the area defined by them. This is the first reason in the Tiebout model for determining the optimal level of decentralization.

c) Areas of Analysis of Territorial Estates

We conclude that in one jurisdiction, which is the field that provides a public good or service, its geographic boundaries should be defined since there is public property (or publicly assigned) to benefit the national level, such as defense, external relations, and basic research. However, other goods generate benefits geographically limited to a particular territory. The objective is to provide these goods according to the preferences of the area benefited and funded by them.

However, the diversity principle states that jurisdictions differ in their preferences, while the territorial principle of equivalence provides that the consumers of goods bear the cost of its provision and make the decisions.

This raises several problems such as:

The possible existence of economies of scale in production.
The possible existence of congestion costs, which are costs generated based on the number of consumers assigned either publicly.

There is the possibility of congestion and agglomeration in the consumption of certain public goods because the utility of individual consumption of goods depends on the amount consumed and the number of consumers. So if this is excessive, utility decreases.

Establishing the optimal illusion jurisdictions or units of service, i.e., the number of users, is essential to be able to provision public goods in terms of preferences. But it is also necessary to set the optimal level of public service in each jurisdiction, i.e., determine the amount of service provided.

Solutions in the Theory of Finance:

In the field of finance theory, it is necessary to find an optimum size of the community for a given level of service.
Find the optimum level of services for different dimensions of the community.
Combining the Optimal Scale and Community Service.

The solutions in reality are:

Sufficiency. Each substation Finance (autonomous regions, municipalities, etc.) should be able to evenly cover the skills you recognize.
Flexibility. The regional accommodations must be financially able to respond to needs at all times they were raised.
Solidarity. The richer regions should help lower the financial capacity to ensure minimum levels of public services.
Generality or privilege. All regional farms must meet the same standard privileges, avoiding each other.

Distribution of Income and Wealth

The objective of this function makes sense from a purely national perspective, except that equitable distribution of income and wealth is intended and achieved by private entities.

The problems with this function are:

The interindividual distribution of a mandatory set would be meaningless since it would result in the voting feet citizens situated geographically in one place or another in terms of fiscal policy measures or measures economic policy in general adapted to their regional governments and/or local level. If the distribution is interindividual voluntarily adopted locally could adapt some programs to combat poverty but with little importance and is usually managed by entities engaged in private charity.
The interregional distribution, rather than policy to prevent individual inequalities applied to compensate for different costs in the production of public goods.

The solution that arises is that:

The redistribution is a function exclusively developed at the national level, leaving only the sub-national level in the hands of private entities.

Stability in the Price Level

The objective of this function is to determine whether local authorities should implement economic policies and whether their actions on revenue and expenditure have significance.

The problem with this feature:

Local entities are characterized by a high level of imports and a very low value of the expenditure multiplier and borrowing generally obtained and placed outside the jurisdiction. Also, because there is a single currency across the country, the central government controls monetary policy. Therefore, a policy of stability at the local level makes no sense, so that policy stability is meaningful only at the national level.

Development

Development is a function that transcends the local level without prejudice to having much in common with the allocation policy; therefore, the role of development should be a national responsibility.

2. Skills and Redistribution Across Jurisdictions

a) Theoretical

The aim is to achieve the optimal level of service in a jurisdiction with optimal size.

The assumptions are:

The existence of social goods with a limited geographical scope.
The equivalence principle of territoriality: decisions must be made by those who bear the cost.
The existence of diversity.
There are increasing average costs in the provision of social goods.
There is the possibility of congestion in the provision of social goods.

Solutions that have been adopted:

Find the optimum size of the community for a given level of service.
Find an optimal level of service to different dimensions of the community.
Combining the two previous solutions to achieve an optimal set.

b) Solutions in Practice

The economic policy unit is marked by the Central State.
The responsibility of the Central Treasury in the distribution.
Recognition of the financial autonomy of the regions colored by the need to maintain a certain unity prosecutor.
Need to maintain the principle of generality and no privilege between regions. The principle of sufficiency, flexibility, and solidarity.

c) Models of Division of Powers

There are three models:

The horizontal distribution of powers: This model is common when a federal state is formed based on existing regions, in which there is a wide degree of autonomy. The State is attributed a closed list of exclusive powers, and all other powers are attributed to the subject that is not owned by this closed list, i.e., the regions.
The vertical distribution of powers: This is common when a federal state is formed from a unitary state in advance. There is a limited degree of autonomy in all competitions initially attributed to the State, and regions can develop only those services that the state has not previously developed.
The joint distribution of competencies: This identifies a list of subjects that are allocated exclusively, usually to the State, and a list of materials which allows the concurrence of the State and the regions or communities.

d) Funding Models

There is a unique system of continued revenue statewide. The treatment is as follows: Communities or regions participating in the income tax system maintained at the state level only.
Advantages: The distribution of tax burdens nationwide is uniform, and the cost of administering the tax system will be smaller.
Disadvantages: There is no correspondence between the departments that are perceived at the regional level and the taxes that are placed at the state level. Frequently there are often conflicts between regional authorities wishing to spend and national authorities are those who finance the spending. There is a very pronounced tendency to deficits in different communities or regions.
Own tax system in each community or region. Each community or region has its own tax system.
Advantage: It can be territorial equivalence between revenues and expenditures.
Disadvantage: The distribution of the tax burden is not uniform throughout the country, and the costs of administering the tax system tend to be higher.
Mixed system. This model limits the ability to earn their own regions. There is a tendency to a single national system with some figures used as the regions’ own taxes. The most widely used are those levied on property. Moreover, there are benefits coming from income such as public prices, rates, special charges, these being the most important source of income. There are also equalization funds and inter-regional solidarity aimed at matching the level of essential services in the various regions regardless of their economic capabilities.

e) Background and Importance of Intergovernmental Grants

The reason for the existence of these subsidies is the existence of dispersion in the provision of social goods. The reason for the existence of these dispersions is that the geographical scope of social well exceeds the scope of the autonomous community, benefiting other communities. Therefore, the purpose of the subsidy is to compensate the communities producing the externality. On the other hand, some local goods are considered at the state level as merit goods. As the central treasury subsidizes the provision of certain goods and services to guarantee and ensure the provision of minimum levels of this service locally.

The tax system is centralized for reasons of incidence, redistribution, and equity. The grants seek to avoid differences in income between communities with uniform service levels by implementing the goal of redistribution, avoiding inefficiencies in the geographic location for tax reasons, and trying to achieve greater equity in central taxes.

Comprehensive types of subsidies:

For the purpose they serve: They can be unconditional or conditional. – Untied funds can be applied both to produce tax-free to fund any public service. – As stipulated in these funds should be used to improve public services, can be of two types: general: they are intended to cover any utility-selective: those intended to finance a particular public service.
For its calculation: Given the cost of subsidized services or participation in certain state revenues. Subsidies can have the following effects: -filtering effect, whereby the grant received is filtered to other services or consumed in reducing taxes. -Adhesion effect: according to which the grant received is attached to the existing budget resulting in an overproduction of service. / As a result, untied grants are more expensive if you want to increase the social consumption of goods as they may leak. Selective subsidies tend to be more efficient while not ruling out the possibility of an effect adhesion.

3. International Public Finance

a) Aspects of Public Finance at the International Level

The role played by national treasuries and international public finance approach of a supranational international level is caused and conditioned by the following factors:

Growing volume of trade between nations.
Higher ratios between rich and poor countries.
Existence of international organizations like the UN, NATO, IMF, European Union, OECD, etc.

Issues to consider in the supranational:

There should be a joint provision of public services at the national level, and if there is, what services should be provided internationally. Relationships and transactions between countries create distortions that action is needed to achieve a more equitable distribution of income between nations. To do this, it is argued that instruments used to fight poverty worldwide. It is a priority in an open economy also to get the economic balance and stability among nations; this requires the coordination of stabilization policies since instability of a national economy can affect the economies with which it interacts.

Resource Allocation

The purpose of this function is the joint provision of specific public services. The form of participation in most cases is voluntary; in fact, in the case of the European Union, commitments are taken by majority. There are different degrees of involvement.

Degrees of participation:

Projects in some states, international bridges down.
Projects in several states, as is the case of the European Union and NATO.
Projects-General, as is the case of the UN or the IMF.

Joint funding of these services:

The fundamental problem that arises is the share of costs for each country. For this purpose, the funding criteria that apply are 2:

Equal costs
Proportional costs – Following the approach of GDP or GDP per capita following the third approach is negotiation between members; this approach takes into NATO.
Mixed-criteria, the United Nations is adopted in the determination of an initial deal which was later tweaked exemptions, minimum and maximum stakes and general limitations.

Income Distribution

Intentional income differences are much greater than national ones. However, the problem is the difficult quantification of inequality between countries. This can be measured following 2 positions:

First, following the assumption that in each country all have a certain average income per capita
Considering the interior layout.

On this basis, it helps raise different policy:

The first is redistribution patterns of which is shared by all income in terms of absolute equality but establishing minimum living.
Development aid according to which aims to increase the amount of collection and distribution accordingly. So down low mortgage interest rates are implemented measures to promote open markets, etc.

Stability in Open Economies

In this role, it is necessary to coordinate national policies for stability because it can give the following situation:

If a general depression is a country reviving its economy. Part of its economic impetus is leaked to other countries via imports; these leaks can be analyzed from the theoretical point of view through the multiplier. We know that the Keynesian multiplier in a closed economy is greater than the multiplier in an open economy. Making it easy to say that could lead to leakage. In addition, separate exchange rates exert a significant influence on international economic policy. It is therefore essential to coordinate the same.

b) Coordination of Taxation and International Double Taxation

Definition and Causes

What is double taxation? It is therefore necessary to differentiate between international and economic double taxation.

Economic double taxation is the multiple taxation or rents the same goods in different national jurisdictions.
International double taxation is the taxation multiple identical or similar purpose of taxation in the same jurisdiction.

The causes of international double taxation are: results from the overlap of domestic and taxes on goods and income. This requires establishing the concept of the residence. Who is a resident and who is not. The assessment by the criterion of territoriality or the source, i.e., silos Taxes are imposed on the place where the taxable event takes place on the place or residence of the taxpayer. Establish whether the lien is personal or real. And finally set the levy on the principle source of employment.

General Solutions for International Double Taxation

Establish exemptions, refunds, and compensation charges.

Solution-Specific Systems to the Similarities Between Different Tax Sovereignty

Fiscal sovereignty agreements that are developed in response to 3 principles:

Principle of residence. Supposed to stay for more than 6 months in a given country so that you get the tax the country of residence.
Top of the world’s income. Involves the accumulation of all income in the country of residence.
Principle of compensation. Is a system of tax credit for the tax paid abroad generally limited to the amount of the charge of the national tax equivalent.
System-border tax adjustment.

Border tax adjustments following the system of indirect taxation GATT established the principle of destination so that the goods which are the subject of international traffic should be taxed in the country.

The European Experience

In the EU, tax harmonization has been translated by a fiscal equalization system as there is no supranational authority dictates. There is a differential alignment, harmonization standard which is designed as an ideal tax system with progressive alignment of the international tax system. The ideal tax system design is intended to act on excise taxes on sales, and in particular, Neumark and Ruding report are those that have put more emphasis on the ideal tax system.