Abstract:
Many developing countries have
been strengthening subnational
government through decentralisation
policies (Shah 2004). The supporting
argument is based on the increased
efficiency and welfare gains that come
from moving governance closer to the
people (Bahl 2009). Fiscal decentralisation
can increase revenue mobilisation
because it involves subnational government
more directly in taxation, and, in
many respects, a lower tier of government
can reach wealth-based taxes in
ways that central government cannot.
The broadening of the local tax base,
particularly with property taxes, gives
subnational government a potentially
lucrative revenue source (Cornia 2013;
Kitchen 2013; Walters 2013).
In terms of revenue mobilisation, the
tax bases that are efficient and simple
to administer at a subnational level tend
to be few (Bird and Slack 2008; Mikesell
2013). Non-tax revenues (including user
charges, licences, rents, and fees) tend
to be limited in scope and revenuegenerating
capacity. Local tax bases,
according to Bird and Slack (2003),
are narrow due to the possibility of tax
exportation, externalities in the provision
of public goods and services, factor
mobility, and economies of scale. Broad
tax bases, such as personal income tax,
corporate income tax, and value-added
tax (VAT), are generally best managed
at higher levels of government. As a result,
if subnational governments are to
be important providers of public goods
and services, it is necessary for higher
level jurisdictions to share part of their
revenues with subnational governments
through transfers and grants to bridge
the gap between spending and revenues
mobilised locally (Bahl and Cyan 2010).
