tax assignment conclusion

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Accounting for Income Tax: A Student Research Project

Individual Income Taxation
Specialized Issues

In a research project in the Master of Accountancy Program at the University of North Carolina at Charlotte, students completed an in-depth study of the consolidated financial statements and accompanying footnotes of a publicly traded, multinational company based in the southeastern United States. This project is easily adaptable for use in both undergraduate and graduate accounting and tax programs.

Background of ASC Topic 740

Standards for accounting for income taxes were previously provided in FASB Statement No. 109, Accounting for Income Taxes , which was issued in 1992. This statement was codified mostly in FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes (Topic 740). When the statement was issued, FASB recognized that "income taxes must be computed for complex business transactions within the context of voluminous, complicated, and constantly changing tax laws, rules, and regulations" ( ¶ 69).

The Financial Accounting Foundation issued its Post-Implementation Review Report on the standard in 2013, in which the review team found that "complying with Statement 109 is more difficult today than when the standard was issued because of increased complexities resulting from changes in the economic environment and the tax laws as well as increased operations by U.S. companies in many different foreign jurisdictions."

The review team found preparers and practitioners had difficulties in applying the standard in the following areas: (1) accounting for valuation allowances and (2) computing deferred tax liabilities and deferred tax assets. Preparers and practitioners also face operational challenges in the following areas: (1) intraperiod tax allocations; (2) accounting for intercompany transfers of assets; and (3) situations in which a deferred tax liability is not recognized for earnings determined to be indefinitely reinvested in foreign subsidiaries. The review team also found that investors who participated in the study had difficulty understanding income tax information provided in the financial statements.

In 2006, FASB issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes , which clarified accounting for uncertainty in recognition of income taxes in financial statements. FIN 48 (which is also incorporated mostly into Topic 740) provided guidance on measuring and reporting the benefits of tax positions taken or expected to be taken on tax returns. However, companies continue to face uncertainty in estimating the probability that a tax position would be sustained on audit. This estimate is necessary because a company may recognize only the amount of a benefit from a tax position that has more than a 50% likelihood of being sustained on examination by the taxing authority in its financial state ments.

Purpose of the Student Project

The research project was designed to give students a better understanding of the application of Topic 740 in the real world. Students often find this subject challenging, in part because of the complexities described above. Another reason students fail to fully understand this area of accounting is their lack of experience in reading and analyzing published financial statements, particularly those segments covering accounting principles and reporting practices for income tax expense and related accounts.

Accounting students need to gain an awareness of the variety and complexity of business transactions to succeed in understanding how businesses measure and report income tax expense and related accounts. The study of financial statements and related footnotes in an annual report provides a path for students to gain this awareness and an understanding of Topic 740.

Nature of the Project

The project was an independent study in which graduate students committed to study a published annual report of a designated company for one semester. The students' objective was to learn as much as possible about current financial reporting practices in audited financial statements prepared in accordance with GAAP. In that context, students focused on all significant accounts involving application of Topic 740's rules. For each account, the students conducted research on the applicable U.S. tax rules and consulted Topic 740 to determine the applicable GAAP rules.

The instructor met with the students and discussed the nature of the assignment, as well as the sequence of research steps. The students' first step was to read the annual report to learn about the company's operations and financial statements. Then the students began identifying balance sheet and income statement accounts that involve book-tax differences. The instructor and students had several meetings and exchanged emails about the preliminary findings and the identification of the most significant accounts requiring analysis in the student reports.

A master of accountancy student may have (or may acquire) an internship or full-time job with a company under study, or with the accounting firm that provides tax and/or audit services for the company. The students were instructed not to obtain any supplementary information from the company or its accounting firm because that could result in disclosure of confidential information. For this project, the research sources were limited to the published annual report and other documents filed with the SEC. This restriction is consistent with the intended focus of the research project.

Research Procedure

As noted earlier, the first step was to identify accounts that involve (1) one set of rules for computing book income and (2) a different set of rules for computing taxable income on a U.S. corporate income tax return. The students conducted research to determine applicable GAAP rules and tax rules the company used for those accounts. Resulting differences in book income and taxable income for the current period were identified as either permanent or temporary differences. Deferred tax assets and deferred tax liabilities resulting from temporary differences in the book and tax basis of assets and liabilities were described. Also identified were deferred tax asset accounts associated with losses and credits carried forward and used in future periods.

Next, the students addressed issues related to (1) uncertainties whether deferred tax assets will be realized and whether valuation accounts may be needed and (2) uncertainties whether tax positions will be sustained upon audit, which may require the accrual of additional tax liabilities. Finally, the students examined the procedure for computing both the income tax provision and the effective income tax rate.

The company in this study had sales of about $255 million in its latest fiscal year. In each of the last three years, the company had net income before tax expense (benefit) in the range of $14 million to $15 million. The company's federal corporate statutory income tax rate was 34% in each of the last three years, while the company's effective income tax rate ranged from negative 7.3% to positive 7.9% during that period.

Companies report effective tax rates that are lower than the statutory rates as a result of: (1) earning income that is not subject to income tax, such as municipal bond interest income; (2) earning income in a foreign country where income tax rates are lower than the U.S. statutory income tax rate; (3) reducing the valuation account balance for deferred tax assets; and (4) other factors. The company in this study reduced the effective tax rate by 26% for the latest fiscal year as a result of reducing the balance in the valuation account for deferred tax assets. A study by the U.S. Government Accountability Office found that about 33% of large corporations had effective tax rates of 10% or less ( U.S. Multinational Corporations: Effective Tax Rates Are Correlated With Where Income Is Reported , Rep't No. GAO-08-950 (8/12/08)).

The balance sheet for the company contains seven asset and liability accounts related to income tax. The footnotes indicate the company had gross deferred tax assets of approximately $30 million and deferred tax liabilities of about $5 million. Operating loss carryforwards accounted for about 80% of the total amount of deferred tax assets. A valuation allowance of $12 million was reported for the deferred tax assets. Unrecognized tax benefits are related to 27% of the gross deferred tax assets. Significant deferred tax assets and deferred tax liability accounts are listed in the exhibit .

Adapting Project for Use as a Regular Course Assignment

Using this project in a stand-alone course requires students to commit more time than is usually required for an extra project in a standard tax course. However, the instructor has modified the project substantially to use it in the corporate tax course and in other tax courses.

The headquarters for a major home improvement chain (Lowe's) is near the university. Each semester, the corporation provides copies of its annual report for all students in tax courses taught by the co-author, Howard Godfrey. Before the first class, the instructor studies the financial statements, the income tax footnote, and other footnotes containing relevant information about accounts affected by Topic 740. The annual reports are distributed on the first day of class, and the instructor leads the class on a journey-moving from the financial statements to the footnotes and back several times as information about various accounts or notes is analyzed.

For example, the footnote for property indicates that the straight-line method of depreciation is used in the financial statements, setting the stage for a visit to the balance sheet and to the tax footnote showing a substantial deferred tax liability for the property. The effective income tax rate found in the tax footnote is verified by referring to the income tax provision in the income statement. The details of the income tax provision in the tax footnote are related to the income tax provision shown in the income statement. The deferred tax asset for net operating losses in foreign jurisdictions and the related valuation allowance account are explained by the instructor, as well as the note indicating that the company has not provided for deferred income taxes for undistributed earnings of foreign subsidiaries. A substantial part of the first class is devoted to studying the annual report. Students are asked to keep their copies of the report for reference later in the semester, especially when the accounting for income tax topic is covered.

Benefits From the Project

In many cases, students in a master of accountancy tax course are just a few months away from starting careers in public accounting (or corporate accounting, etc.). A new graduate may quickly become involved in a "crash course" learning about an important client (or the individual's corporate employer). The graduate may need to quickly learn about the company's (1) business operations; (2) applicable GAAP; (3) tax issues; (4) tax returns; and (5) financial reporting practices.

Students reported the following benefits or discoveries from the project:

• Learning about, and reconciling, book-tax differences using the annual report, tax law, and FASB resources is quite different from learning in a classroom setting or solely from a textbook.

• At the beginning, the project can be somewhat intimidating if they do not have experience studying financial statements.

• Conducting research using a tax research service and the FASB ASC may help when they work simulations on the Uniform CPA Examination.

• The project provides a glimpse into the type of tax issues students will face when preparing tax returns.

It provides an opportunity to learn the language used in financial statements and gain practice thinking analytically.

Getting CPAs Involved in the Project

There is a potential for getting CPAs involved in the project in at least two ways. First, the instructor may have a guest speaker who has a role in preparing the financial statements and the footnotes, either as an accountant or as a tax specialist for the company under study. The speaker may explain the process by which the company accumulates the information for the financial statements and the footnotes, and the process for preparing those documents. The speaker may shed some light on how decisions are made about the need for an allowance account for deferred tax assets, the identification and measurement of uncertain positions, etc. The speaker may be able to use some of the footnotes as a foundation for the presentation and may be able to present some "problems" for classroom discussion. The corporation may understandably limit the scope of the speaker's presentation somewhat, but such a presentation can potentially provide valuable insights for the students and the instructor.

The second alternative is to invite an individual in an accounting firm who has a role related to accounting for income tax, whether as an auditor or as a tax specialist. If the company under study is a client of the firm, discussion of material in the company's annual report would likely be off-limits. However, if the individual is not involved with the company in that way, he or she can provide valuable information about the firm's policies and practices related to determining what should be disclosed, and how it is disclosed in the relevant footnotes of its clients. Other topics may include firm procedures related to deferred tax asset valuation issues and determining the level of authority needed to support tax return positions.

Accounting for income taxes is an exciting and important subject for both students and tax faculty. Many forces collide at the intersection of (1) a government enforcing a complex income tax law; (2) a company seeking to minimize its global income tax burden while providing reliable financial statements to its users; and (3) a CPA firm providing assurance regarding the adequacy of the income tax expense accounts, and other related accounts, and the overall reliability of the financial statements including the footnote disclosures. A project, as described in this column, using a corporation whose headquarters is close to the center of academic study, can provide a helpful bridge for accounting and tax students to see the important intersection of GAAP and tax, and be better prepared for their intended career path.

Contributors

is a professor in the Department of Accounting and Finance at San José State University in San José, Calif. She is a member of the AICPA Tax Division Tax Executive Committee and the Tax Reform Task Force. is a professor of accounting at the University of North Carolina at Charlotte. and are graduates of the Master of Accountancy Program at UNC—Charlotte. Ms. Duong is an international tax associate, and Ms. Humphries is a tax associate, both for Grant Thornton LLP. For more information about this column, please contact Prof. Godfrey at .

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How to Write a Conclusion for Research Papers (with Examples)

The conclusion of a research paper is a crucial section that plays a significant role in the overall impact and effectiveness of your research paper. However, this is also the section that typically receives less attention compared to the introduction and the body of the paper. The conclusion serves to provide a concise summary of the key findings, their significance, their implications, and a sense of closure to the study. Discussing how can the findings be applied in real-world scenarios or inform policy, practice, or decision-making is especially valuable to practitioners and policymakers. The research paper conclusion also provides researchers with clear insights and valuable information for their own work, which they can then build on and contribute to the advancement of knowledge in the field.

The research paper conclusion should explain the significance of your findings within the broader context of your field. It restates how your results contribute to the existing body of knowledge and whether they confirm or challenge existing theories or hypotheses. Also, by identifying unanswered questions or areas requiring further investigation, your awareness of the broader research landscape can be demonstrated.

Remember to tailor the research paper conclusion to the specific needs and interests of your intended audience, which may include researchers, practitioners, policymakers, or a combination of these.

What is a conclusion in a research paper, summarizing conclusion, editorial conclusion, externalizing conclusion, importance of a good research paper conclusion, how to write a conclusion for your research paper, research paper conclusion examples.

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Frequently Asked Questions

A conclusion in a research paper is the final section where you summarize and wrap up your research, presenting the key findings and insights derived from your study. The research paper conclusion is not the place to introduce new information or data that was not discussed in the main body of the paper. When working on how to conclude a research paper, remember to stick to summarizing and interpreting existing content. The research paper conclusion serves the following purposes: 1

Warn readers of the possible consequences of not attending to the problem.
Recommend specific course(s) of action.
Restate key ideas to drive home the ultimate point of your research paper.
Provide a “take-home” message that you want the readers to remember about your study.

Types of conclusions for research papers

In research papers, the conclusion provides closure to the reader. The type of research paper conclusion you choose depends on the nature of your study, your goals, and your target audience. I provide you with three common types of conclusions:

A summarizing conclusion is the most common type of conclusion in research papers. It involves summarizing the main points, reiterating the research question, and restating the significance of the findings. This common type of research paper conclusion is used across different disciplines.

An editorial conclusion is less common but can be used in research papers that are focused on proposing or advocating for a particular viewpoint or policy. It involves presenting a strong editorial or opinion based on the research findings and offering recommendations or calls to action.

An externalizing conclusion is a type of conclusion that extends the research beyond the scope of the paper by suggesting potential future research directions or discussing the broader implications of the findings. This type of conclusion is often used in more theoretical or exploratory research papers.

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The conclusion in a research paper serves several important purposes:

Offers Implications and Recommendations : Your research paper conclusion is an excellent place to discuss the broader implications of your research and suggest potential areas for further study. It’s also an opportunity to offer practical recommendations based on your findings.
Provides Closure : A good research paper conclusion provides a sense of closure to your paper. It should leave the reader with a feeling that they have reached the end of a well-structured and thought-provoking research project.
Leaves a Lasting Impression : Writing a well-crafted research paper conclusion leaves a lasting impression on your readers. It’s your final opportunity to leave them with a new idea, a call to action, or a memorable quote.

Writing a strong conclusion for your research paper is essential to leave a lasting impression on your readers. Here’s a step-by-step process to help you create and know what to put in the conclusion of a research paper: 2

Research Statement : Begin your research paper conclusion by restating your research statement. This reminds the reader of the main point you’ve been trying to prove throughout your paper. Keep it concise and clear.
Key Points : Summarize the main arguments and key points you’ve made in your paper. Avoid introducing new information in the research paper conclusion. Instead, provide a concise overview of what you’ve discussed in the body of your paper.
Address the Research Questions : If your research paper is based on specific research questions or hypotheses, briefly address whether you’ve answered them or achieved your research goals. Discuss the significance of your findings in this context.
Significance : Highlight the importance of your research and its relevance in the broader context. Explain why your findings matter and how they contribute to the existing knowledge in your field.
Implications : Explore the practical or theoretical implications of your research. How might your findings impact future research, policy, or real-world applications? Consider the “so what?” question.
Future Research : Offer suggestions for future research in your area. What questions or aspects remain unanswered or warrant further investigation? This shows that your work opens the door for future exploration.
Closing Thought : Conclude your research paper conclusion with a thought-provoking or memorable statement. This can leave a lasting impression on your readers and wrap up your paper effectively. Avoid introducing new information or arguments here.
Proofread and Revise : Carefully proofread your conclusion for grammar, spelling, and clarity. Ensure that your ideas flow smoothly and that your conclusion is coherent and well-structured.

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Remember that a well-crafted research paper conclusion is a reflection of the strength of your research and your ability to communicate its significance effectively. It should leave a lasting impression on your readers and tie together all the threads of your paper. Now you know how to start the conclusion of a research paper and what elements to include to make it impactful, let’s look at a research paper conclusion sample.


Summarizing Conclusion	Impact of social media on adolescents’ mental health	In conclusion, our study has shown that increased usage of social media is significantly associated with higher levels of anxiety and depression among adolescents. These findings highlight the importance of understanding the complex relationship between social media and mental health to develop effective interventions and support systems for this vulnerable population.
Editorial Conclusion	Environmental impact of plastic waste	In light of our research findings, it is clear that we are facing a plastic pollution crisis. To mitigate this issue, we strongly recommend a comprehensive ban on single-use plastics, increased recycling initiatives, and public awareness campaigns to change consumer behavior. The responsibility falls on governments, businesses, and individuals to take immediate actions to protect our planet and future generations.
Externalizing Conclusion	Exploring applications of AI in healthcare	While our study has provided insights into the current applications of AI in healthcare, the field is rapidly evolving. Future research should delve deeper into the ethical, legal, and social implications of AI in healthcare, as well as the long-term outcomes of AI-driven diagnostics and treatments. Furthermore, interdisciplinary collaboration between computer scientists, medical professionals, and policymakers is essential to harness the full potential of AI while addressing its challenges.

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A research paper conclusion is not just a summary of your study, but a synthesis of the key findings that ties the research together and places it in a broader context. A research paper conclusion should be concise, typically around one paragraph in length. However, some complex topics may require a longer conclusion to ensure the reader is left with a clear understanding of the study’s significance. Paperpal, an AI writing assistant trusted by over 800,000 academics globally, can help you write a well-structured conclusion for your research paper.

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Navigate to Features : Once logged in, head over to the features’ side navigation pane. Click on Templates and you’ll find a suite of generative AI features to help you write better, faster.
Generate an outline: Under Templates, select ‘Outlines’. Choose ‘Research article’ as your document type.
Select your section: Since you’re focusing on the conclusion, select this section when prompted.
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Provide a brief description of your study: Enter details about your research topic and findings. This information helps Paperpal generate a tailored outline that aligns with your paper’s content.
Generate the conclusion outline: After entering all necessary details, click on ‘generate’. Paperpal will then create a structured outline for your conclusion, to help you start writing and build upon the outline.
Write your conclusion: Use the generated outline to build your conclusion. The outline serves as a guide, ensuring you cover all critical aspects of a strong conclusion, from summarizing key findings to highlighting the research’s implications.
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The research paper conclusion is a crucial part of your paper as it provides the final opportunity to leave a strong impression on your readers. In the research paper conclusion, summarize the main points of your research paper by restating your research statement, highlighting the most important findings, addressing the research questions or objectives, explaining the broader context of the study, discussing the significance of your findings, providing recommendations if applicable, and emphasizing the takeaway message. The main purpose of the conclusion is to remind the reader of the main point or argument of your paper and to provide a clear and concise summary of the key findings and their implications. All these elements should feature on your list of what to put in the conclusion of a research paper to create a strong final statement for your work.

A strong conclusion is a critical component of a research paper, as it provides an opportunity to wrap up your arguments, reiterate your main points, and leave a lasting impression on your readers. Here are the key elements of a strong research paper conclusion: 1. Conciseness : A research paper conclusion should be concise and to the point. It should not introduce new information or ideas that were not discussed in the body of the paper. 2. Summarization : The research paper conclusion should be comprehensive enough to give the reader a clear understanding of the research’s main contributions. 3 . Relevance : Ensure that the information included in the research paper conclusion is directly relevant to the research paper’s main topic and objectives; avoid unnecessary details. 4 . Connection to the Introduction : A well-structured research paper conclusion often revisits the key points made in the introduction and shows how the research has addressed the initial questions or objectives. 5. Emphasis : Highlight the significance and implications of your research. Why is your study important? What are the broader implications or applications of your findings? 6 . Call to Action : Include a call to action or a recommendation for future research or action based on your findings.

The length of a research paper conclusion can vary depending on several factors, including the overall length of the paper, the complexity of the research, and the specific journal requirements. While there is no strict rule for the length of a conclusion, but it’s generally advisable to keep it relatively short. A typical research paper conclusion might be around 5-10% of the paper’s total length. For example, if your paper is 10 pages long, the conclusion might be roughly half a page to one page in length.

In general, you do not need to include citations in the research paper conclusion. Citations are typically reserved for the body of the paper to support your arguments and provide evidence for your claims. However, there may be some exceptions to this rule: 1. If you are drawing a direct quote or paraphrasing a specific source in your research paper conclusion, you should include a citation to give proper credit to the original author. 2. If your conclusion refers to or discusses specific research, data, or sources that are crucial to the overall argument, citations can be included to reinforce your conclusion’s validity.

The conclusion of a research paper serves several important purposes: 1. Summarize the Key Points 2. Reinforce the Main Argument 3. Provide Closure 4. Offer Insights or Implications 5. Engage the Reader. 6. Reflect on Limitations

Remember that the primary purpose of the research paper conclusion is to leave a lasting impression on the reader, reinforcing the key points and providing closure to your research. It’s often the last part of the paper that the reader will see, so it should be strong and well-crafted.

Makar, G., Foltz, C., Lendner, M., & Vaccaro, A. R. (2018). How to write effective discussion and conclusion sections. Clinical spine surgery, 31(8), 345-346.
Bunton, D. (2005). The structure of PhD conclusion chapters. Journal of English for academic purposes , 4 (3), 207-224.

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Expenditure and Revenue Assignment: Principles

First Online: 06 September 2019

Cite this chapter

Harry Kitchen 4 ,
Melville McMillan 5 &
Anwar Shah 6

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This chapter provides a conceptual overview of the principles of expenditure and revenue assignment to local governments. Local government is seen to be more aware of local preferences and conditions and more accountable to local residents than senior governments. Core and noncore responsibilities are distinguished (e.g., local streets versus schooling). Financing follows function. Financing follows the benefit criterion; that is, local residents pay for the local services from which they benefit—with user charges and local taxes although grants may be needed. Various (especially) noncore services involve interjurisdictional spillovers and/or redistributive considerations and so, if assigned to local governments require intergovernmental transfers to achieve efficiency and equity objectives. Financing alternatives and appropriate uses are reviewed.

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The vast number of references found in Bahl and Bird ( 2018 ) and Boadway and Shah ( 2009 ), two books providing comprehensive examinations of fiscal federalism and decentralization, illustrate the growth and extent of the literature. Earlier valuable contributions include those by Bahl and Linn ( 1992 ), Bird et al. ( 1995 ), Litvack et al. ( 1998 ), Manor ( 1999 ), McLure ( 1983 , 1999 ), OECD ( 1987 , 1997 , 1999 ), Owens and Norregaard ( 1991 ), Shah ( 1991 , 1994 ), and Ter-Minassian ( 1997 ).

A resulting additional argument for decentralization is that it enhances political participation. Greater responsiveness, accountability, and enhanced participation have long been seen as advantages of decentralization in the political literature. Other widely noted potential positive features of local government are greater transparency of government to local residents and, of course, greater autonomy. Shah ( 2014 ) advocates for movements toward FAIR (fair, accountable, incorruptible, and responsive) local governance and outlines a framework for evaluation. Blending these desirable characteristics with the economics of fiscal federalism has created a powerful case for decentralization and a more valuable tool for the analysis of decentralized government.

Besley and Coate ( 2003 ) have extended the theory underlying the conventional arguments for decentralization. Their more general model assumes cost sharing of centrally provided outputs under a nationally uniform tax system, allows for non-uniform central provision across localities, locally elected representation to the central government, cooperative and non-cooperative legislative decision-making, varying degrees of heterogeneity in local tastes, and varying interjurisdictional spillovers. Heterogeneity of tastes and the degree of spillovers are central to the centralization-decentralization choice with less heterogeneity and more spillover favoring centralization. However, the case for decentralization is surprisingly strong and prevails even when tastes are uniform and spillovers significant. Also see Ingram and Hong ( 2008 , 17–108).

Critical assessments of fiscal federalism and, particularly, decentralization have emerged—motivated in part by difficulties experienced within some countries. Oates ( 2005 ) characterized those as an emerging second-generation of fiscal federalism. He categorized the second-generation literature (notably in Oates 2008 ) as having two strands. The first strand applies a broader range of economic modeling (i.e., beyond the more conventional public finance) to the questions of fiscal federalism while the second strand evolved from public choice with a focus on political institutions. Both address problems with decentralization that have or might occur. A dominant concern is the problems that emerge with soft (rather than hard) budget constraints on decentralized governments. Essentially, the second-generation literature focuses on problems that can arise when there are flaws in the decentralization design. Surveys of the impacts of decentralization generate mixed results but do point to the importance of good design and implementation (e.g., see Bahl and Bird 2018 , Chapter 2). Also, there is some evidence that better-quality government enhances personal well-being (Helliwell and Huang 2008 ; Helliwell et al. 2018 ) and, though somewhat mixed and deserving of more detailed analysis, that decentralization can also increase well-being/life satisfaction (e.g., Bjornskov et al. 2008 ; Diaz-Serrano and Rodriguez-Pose 2012 ; Gao et al. 2014 ; Tomaney et al. 2011 ). Closely related is a literature on measuring the decentralization of government (e.g., Ivanyna and Shah 2014 ; Hooghe et al. 2010 , 2016 ; Hooghe and Marks 2016 ). The OECD provides valuable recent overviews of fiscal federalism and decentralization (e.g., OECD 2013 , 2016 , 2018 ).

It is important to recognize that borrowing is not a substitute for adequate funding. Debt must be repaid and debt-servicing costs met from the borrowing government’s revenues. Borrowing only facilitates financing long-term capital investments, particularly when they are large and irregular.

For example, see Wiesner ( 2003 ) for a discussion of the role of market-based decentralization in Latin America and Dollery and Wallis ( 2001 ) for a more general discussion of competition in the delivery of public services. Oates ( 1999 ) includes a discussion of market-preserving federalism.

See Tresch ( 2015 , Chapters 26 and 27) for a discussion of a redistributional role for local government.

For further discussion of the topics addressed in this section, see, for example, Dollery and Wallis ( 2001 , Ch 2), Fisher ( 1996 , Ch 6), and Oates ( 1972 ).

See a public finance text (e.g., Fisher 1996 ) for details of the ideal allocation of the cost of public goods. The basic idea is that each individual is charged a personal marginal cost equal to that person’s marginal benefit and the ideal level of output exists when, in the case of a pure public good, the sum of all individual marginal benefits equals the marginal cost of the output.

The problem of distinguishing between economics of sharing and economies of scale is that it is often difficult to distinguish between units of output when many individuals benefit from the same unit of output. For example, there could be economies of scale in the operation of an air pollution abatement system (e.g., cost per unit of particulate matter removed decline to some point) but the benefits of the improvement in air quality resulting from some additional abatement (change in output) could be enjoyed by many or few people (economies of sharing).

For insight into and a brief review of empirical economies of scale analyses, see Byrnes and Dollery ( 2002 ).

For discussion and empirical insights, see McMillan et al. ( 1981 ) and McMillan ( 1989 ).

For illustrations of the assignment of responsibilities among multi-tiered governments, see Table 4.1 of Chap. 4 and Shah ( 2006 , Chapter 1).

Even when services are purely local, citizens may prefer having an upper-level government to review certain activities (e.g., water quality, sewerage treatment, refuse disposal) to provide an informed and independent assessment of performance and especially of the less observable aspects.

See Dahlby ( 2001 ) for a “consensus view” of tax assignments. The shift of the payroll tax to the upper tier(s) of government has been prompted as well by its widespread utilization by senior governments to finance earmarked social benefit programs such as unemployment insurance and social security/pensions.

This treatment reflects the usual top-down perspective on tax assignment in that the matter is decided at the center. In some cases, however, tax assignment is a bottom-up decision where federating states decide upon what tax powers the new central authority should have. See Dahlby ( 2001 ).

In the interests of maintaining the advantages of an internal common market (i.e., free trade within the country) the only taxes, if any, on cross-border movements of goods and services should be national levies on foreign trade.

Bird ( 1999 ) argues that the international adoption of national value-added taxes and their revenue importance have contributed to this centralization.

A broader discussion of transfers—beyond the gap-closing role—appears in the latter part of this chapter.

Dahlby ( 2001 ) notes several problems with the “consensus” view. Those are (a) the need to link expenditure and tax decisions, (b) a need to consider expenditure assignment and grant systems, (c) neglect of distributional impacts of subnational government policies, (d) overlooking certain problems of joint occupancy of tax fields, (e) ignoring that some economic shocks calling for stabilization are region specific, and (f) putting little emphasis on administration and compliance costs of alternative tax assignment regimes.

It is important to remember that property taxes, and especially those taxing improvements as well as land, also may not match benefits exactly and, like a local personal income tax, involve some redistribution. On the other hand, a local personalincome tax may match better benefits and costs for a local service such as schooling.

Kitchen and Slack ( 1993 ) found that about 40 percent of municipal government (i.e., nonschooling) expenditure benefited nonresidential property.

Also see Bahl and Bird ( 2018 , pp. 208–211).

When prices for the services of local government enterprises are above the levels consistent with user charges (e.g., utility charges exceed full costs), the difference is effectively a special sales tax on those services.

For those reasons, Bird ( 1999 ) has recommended a more uniform local business value-added tax.

Besides the references cited below, the following provide valuable insights into intergovernmental transfers: Bird ( 2000 ), Bird and Smart ( 2002 ), Ebel and Yilmaz ( 2001 ), Martinez-Vazquez and Searle ( 2007 ), Shah ( 1999 , 2004 ), and Shah and Thompson ( 2004 ).

At the local government level, however, fiscal disadvantages may be offset in part through capitalization into property values.

Bird ( 1993 ) offers an additional rationale for conditional matching grants. Conditional matching funding can induce local governments to spend some of their own funds on the grantor’s priorities (e.g., achieving minimum standards or greater uniformity of local services) thus stretching the grantor’s budget. While a legitimate perspective, the basis for the mutual interest is in some shared or spillover benefits. Gramlich ( 1977 ) classifies conditional transfers aimed at such grantor policy objectives as also blending the advantages of centralized finance and decentralized supply as having a political-institutional justification. However, because those grants have an efficiency basis, they are distinguished here from the politically motivated grants below.

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Kitchen, H., McMillan, M., Shah, A. (2019). Expenditure and Revenue Assignment: Principles. In: Local Public Finance and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-21986-4_2

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Expert Tips for Effective Taxation Assignment Writing

Create a Plan Before You Start Writing Your Taxation Assignment

Understanding Your Assignment and Conducting Research

Before starting your taxation assignment, it is essential to fully comprehend the guidelines provided by your professor or educational institution. The foundation for your entire writing process is laid during this crucial step. Spend some time reading through the assignment instructions or prompt, paying close attention to specifics like the topic, scope, word count, and formatting requirements.

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A Good Local Tax

A good local tax adequately supports a decentralized public expenditure system. The literature on fiscal federalism and local government finance 2 generally suggests that the following criteria and considerations should form the basis for decisions on which taxes can adequately be assigned to the subcentral level and which should remain at the national level.

To the extent that the tax in question is aimed at, and is suitable for, economic stabilization or income redistribution objectives, it should be left to the responsibility of the central government.

The base for taxes assigned to the local level should not be very mobile, otherwise taxpayers will relocate from high to low tax areas, and the freedom of local authorities to vary rates will be constrained. For this reason, general consumption taxes are found at subordinate levels of government only where geographical areas are very large (for example, Canada and the United States). Thus, the more mobile a tax base, the greater the presumption to keep it at the national level.

Tax bases that are very unevenly distributed among jurisdictions should be left to the central government.

Local taxes should be visible, in the sense that it should be clear to local taxpayers what the tax liability is, thereby encouraging local government accountability.

It should not be possible to “export” the tax to nonresidents, thereby weakening the link between payment of the tax and services received.

Local taxes should be able to raise sufficient revenue to avoid large vertical fiscal imbalances. The yield should ideally be buoyant over time and should not be subject to large fluctuations.

Taxes assigned to the local level should be fairly easy to administer or, in other words, the more important economies of scale in tax administration are for a given tax, the stronger the argument for leaving the tax base for that tax to the national level. Economies of scale may depend on data requirements, such as a national taxpayer identification number and computerization.

Taxes and user charges based on the benefit principle can be adequately used at all levels of governments, but are particularly suitable for assignment to the local level, inasmuch as the benefits are “internalized” to the local taxpayers.

This set of broad criteria translates into more specific recommendations regarding which taxes should be assigned to different levels of government, that is, which taxes may be considered good local taxes and which should be left in the domain of the central government. It is generally acknowledged in the literature 3 that the most obvious candidates as good local taxes are land or property taxes and, to some extent, personal income taxes. With some exceptions, turnover or consumption taxes, as well as taxes on capital income, in particular corporate income taxes, are generally considered less appropriate at the local level and in some cases also at the state level 4 because of the mobility of the corresponding tax bases. This broad conclusion derived from principles of local finance seems in very general terms to conform to the financing system actually found in most countries.

The following discussion addresses these questions on a tax-by-tax basis and is intended to cover all the main taxes to which tax assignment is applied in practice (disregarding whether these taxes according to the general principles are considered appropriate at subordinate levels of government or not). The treatment of the different taxes is also intended to be in descending order of importance for subordinate level of governments, although this ordering must necessarily be somewhat subjective (see Tables 2 and 3 ). 5

Distribution of Tax Revenue Among Different Levels of Government

1 Includes supernational authorities’ share of general government total tax revenue for Belgium (1.5 percent), France (0.7 percent), Germany (0.9 percent), the Netherlands (1.4 percent), and the United Kingdom (1.2 percent).

2 Data for general government do not include local government.

Country and Year Tax as Percentage of GDP Central government State government Local government Central government State government Local government Central government State government Local government Central government State government Local government Central government State government Local government Industrial countries Federal Australia (1991) 30.6 79.7 16.9 3.5 100.0 0.0 0.0 2.4 57.8 39.8 72.5 27.5 0.0 45.2 54.8 0.0 Canada (1989) 34.9 50.9 40.2 8.9 63.5 36.5 0.0 0.0 16.2 83.8 40.1 59.4 0.4 60.0 32.4 7.6 Germany (1991) 41.4 73.4 19.7 6.9 39.1 40.8 20.1 2.0 61.2 36.8 79.1 20.8 0.1 100.0 0.0 0.0 Spain (1990) 34.0 87.0 4.8 8.2 92.9 1.2 6.0 5.8 50.5 45.7 81.1 5.7 13.2 99.2 0.0 0.8 United States (1991) 27.7 65.8 20.5 13.8 81.1 17.1 1.7 6.0 6.7 87.3 16.0 68.3 15.7 97.8 2.2 0.0 Unitary Belgium (1990) 45.6 95.6 n.a. 4.4 90.9 n.a. 9.1 100.0 n.a. 0.0 97.0 n.a. 3.0 99.1 n.a. 0.9 France (1991) 43.1 90.5 n.a. 9.5 100.0 n.a. 0.0 100.0 n.a. 0.0 100.0 n.a. 0.0 81.9 n.a. 18.1 Netherlands (1991) 48.5 97.3 n.a. 2.7 100.0 n.a. 0.0 65.1 n.a. 34.9 100.0 n.a. 0.0 96.3 n.a. 3.7 Norway (1990) 45.2 78.8 n.a. 21.2 47.6 n.a. 52.4 37.9 n.a. 62.1 99.6 n.a. 0.4 97.5 n.a. 2.5 Sweden (1991) 54.2 69.6 n.a. 30.4 24.7 n.a. 75.3 100.0 n.a. 0.0 100.0 n.a. 0.0 100.0 n.a. 0.0 United Kingdom (1991) 35.8 96.0 n.a. 4.0 100.0 n.a. 0.0 99.2 n.a. 0.8 100.0 n.a. 0.0 81.6 n.a. 18.4 Developing countries Federal India (1990) 16.5 65.8 34.2 0.0 100.0 0.0 0.0 33.7 66.3 0.0 49.2 50.8 0.0 88.9 11.1 0.0 Argentina (1989) 14.6 60.4 39.6 0.0 34.2 65.8 0.0 49.2 50.8 0.0 85.8 14.2 0.0 61.0 39.0 0.0 Brazil (1991) 24.5 65.0 30.9 4.1 100.0 0.0 0.0 2.2 40.5 57.3 37.9 57.8 4.3 94.2 5.3 0.5 Mexico (1987) 17.8 85.5 11.6 2.9 98.2 1.3 0.6 1.2 0.0 98.8 99.8 0.1 0.1 5.8 77.0 17.2 Unitary Hungary (1990) 48.6 92.4 n.a. 7.6 71.9 n.a. 28.1 100.0 n.a. 0.0 100.0 n.a. 0.0 100.0 n.a. 0.0 Poland (1988) 44.6 78.7 n.a. 21.3 75.9 n.a. 24.1 48.3 n.a. 51.7 85.8 n.a. 14.2 78.5 n.a. 21.5 Israel (1990) 34.7 93.1 n.a. 6.9 100.0 n.a. 0.0 12.3 n.a. 87.7 100.0 n.a. 0.0 98.3 n.a. 1.7 Thailand (1990) 19.7 95.6 n.a. 4.4 100.0 n.a. 0.0 81.9 n.a. 18.1 92.1 n.a. 7.9 100.0 n.a. 0.0 Chile (1988) 20.5 96.2 n.a. 3.8 100.0 n.a. 0.0 19.7 n.a. 80.3 96.5 n.a. 3.5 100.0 n.a. 0.0 Kenya (1991) 23.3 98.3 n.a. 1.7 100.0 n.a. 0.0 0.0 n.a. 100.0 99.5 n.a. 0.5 100.0 n.a. 0.0 South Africa (1990) 27.4 94.5 1.2 4.3 100.0 n.a. 0.0 25.5 n.a. 74.5 96.7 3.3 0.0 100.0 n.a. 0.0 Zimbabwe (1986) 31.3 96.4 n.a. 3.6 100.0 n.a. 0.0 11.5 n.a. 88.5 98.2 n.a. 1.8 98.7 n.a. 1.3

Tax Revenue in Percentage of Corresponding General Government Tax
Total tax			Income tax			Property tax			Domestic taxes on goods and services			Other taxes

Distribution of Different Taxes Within Different Levels of Government

(In percent)

2 There are no state governments in unitary countries.

3 No data on local governments are available.

Country and Year Income tax Property tax Domestic taxes on goods and services Other taxes Income tax Property tax Domestic taxes on goods and services Other taxes Grants as percentage of taxes plus grants Income tax Property tax Domestic taxes on goods and services Other taxes Grants as percentage of taxes plus grants Industrial countries Federal Australia (1991) 71.9 0.3 22.8 5.1 0.0 30.1 40.9 28.9 58.8 0.0 100.0 0.0 0.0 29.9 Canada (1989) 59.3 0.0 21.3 19.4 43.1 3.6 39.9 13.3 21.9 0.0 84.6 1.4 14.0 53.7 Germany (1991) 16.1 0.1 31.5 52.4 62.5 6.6 30.9 0.0 19.2 88.2 11.4 0.4 0.0 44.7 Spain (1990) 33.2 0.4 24.7 41.7 7.6 60.9 31.3 0.2 77.0 22.6 31.1 42.7 3.6 45.1 United States (1991) 55.1 1.1 4.1 39.7 37.4 3.9 55.8 2.9 28.9 5.6 75.3 19.1 0.0 47.6 Unitary Belgium (1990) 35.1 2.7 25.6 36.7 75.8 0.0 17.2 7.0 62.1 France1 (1991) 19.1 2.8 30.6 47.5 0.0 0.0 0.0 100.0 44.7 Netherlands (1991) 33.3 2.3 23.7 40.6 0.0 43.9 0.0 56.1 90.2 Norway (1990) 21.5 1.4 44.7 32.3 87.7 8.6 0.7 3.0 45.9 Sweden (1991) 14.4 4.6 35.5 45.5 100.0 0.0 0.0 0.0 21.5 United Kingdom (1991) 39.1 8.5 33.9 18.4 0.0 1.6 0.0 98.4 85.8 Developing countries Federal India (1990) 18.6 0.5 44.9 36.0 0.0 1.8 89.5 8.7 48.7 Argentina (1989) 6.1 5.2 17.1 71.5 17.9 8.2 4.3 69.5 0.0 Brazil (1991) 22.5 0.1 27.9 49.5 0.0 4.3 89.8 5.9 23.3 0.0 45.5 50.6 3.9 77.5 Mexico (1987) 26.5 0.0 72.5 1.0 2.5 0.0 0.4 97.1 3.3 4.4 7.9 2.3 85.4 5.5 Unitary Hungary (1990) 21.2 0.1 37.1 41.6 100.0 0.0 0.0 0.0 59.4 Poland (1988) 32.0 2.2 32.0 33.8 37.5 8.7 19.6 34.2 29.8 Israel (1990) 42.4 1.0 39.1 17.5 0.0 96.0 0.0 4.0 50.0 Thailand (1990) 26.2 3.6 45.0 25.1 0.0 17.0 83.0 0.0 32.9 Chile (1988) 30.7 0.5 48.8 20.0 0.0 56.0 44.0 0.0 52.1 Kenya (1991) 29.3 0.0 53.7 17.0 0.0 84.2 15.3 0.5 0.0 South Africa (1990) 54.6 1.6 36.6 7.2 0.0 0.0 100.0 0.0 91.5 0.0 100.0 0.0 0.0 37.5 Zimbabwe (1986) 47.6 0.4 32.8 19.2 0.0 77.4 15.7 6.9 80.8

Central Government				State Government					Local Government

Property Taxes

Property taxes, including in particular land taxes, have historically been widely used as subcentral taxes without any special regard to their alleged incidence. This is the outcome of the perceived advantages of the property tax as a local tax. With a property tax it is always clear which authority is entitled to the revenue it yields, which is not always so for income taxes and other taxes. Administration costs are generally found to be lower for a property tax (provided that there is a registry of properties with updated values) than for an income tax, which requires complex tax returns. The yield of a property tax can be predicted more accurately than for an income tax or a profits tax. Finally, some of the tax will be levied on businesses, which seems reasonable to the extent that businesses derive benefits from subcentral services, such as roads and other infrastructure services.

An additional argument for the use of property taxes is that, while almost all residents pay directly or indirectly (through rents) the property tax, thus avoiding free-rider problems in local service provision, this is not always the case for local income taxes. It has also been argued that property taxes are guided by the benefit principle of taxation to the extent that the corresponding spending by local governments benefits local properties by increasing their value. Against this view, it could be held that, although land and existing structures and thus the tax base cannot move in a physical sense, the tax base can do so in a fiscal sense via the capitalization of property taxes to the extent that property taxes are not used for purposes viewed as beneficial to property owners.

The main disadvantage of property taxes lies in the fact that they almost universally realize lower amounts than needed. There are many reasons for this, including the fact that it is a very visible tax (and thus politically unpopular), that it is perceived to have unwanted distributional consequences to the extent that the tax is borne by renters and not by owners of property, and that there are problems associated with the measurement of the tax base, including in particular the “correct” valuation of property, and its updating.

Some countries prefer to distinguish between residential property and commercial and industrial property, with the former being assigned to local taxation, and the latter either to local taxation with a uniform rate or to national taxation only (as is the case in some Nordic countries). In this regard, a particularly contentious issue in many countries (whether industrial, developing, or in transition) has been the taxation of agricultural land. In countries with a general income tax (including income from agriculture), a tax on land could be seen as a discriminatory surcharge on a basic factor input in one sector of the economy, rather than a local benefit tax. In countries without an income tax on agriculture, it has been argued that a land tax on agriculture impedes the development of this important foreign exchange earning sector. Whatever the merits of these arguments may be, the relatively modest tax burden on agriculture found in most countries (which is generally independent of the level of development of the countries in question) seems to reflect the political influence of this sector rather than economic principles or sound fiscal policies.

Other countries apply alternative criteria for the assignment of property taxes to different levels of government. In Brazil, for example, urban property is taxed at the municipal level, while the federal government levies and administers the tax on rural property.

More specifically, at least four important issues relate to the definition and measurement of the base upon which property taxes are levied: the coverage of the base, the use of capital or rental values, the number and nature of exemptions, and the frequency and methods of updating property values. The main issue regarding coverage has been whether land, improvements to land, and buildings should all be subject to tax. The systems applied vary substantially between countries, although most of the countries for which information is available include the unimproved value of land, the value of land improvements, and usually also the value of buildings. The efficiency and equity implications of property taxes have been intensively debated in the literature and will not be pursued further here (see McLure (1977) for an overview of the issues).

In principle, the impact of using rental values or capital values should be the same, assuming well-functioning property and capital markets. It has been argued, however, that there may be major differences in the actual outcome to the extent that rental values reflect mainly the current use of the property, while capital values are said to reflect the value of the property in the best alternative use. Also in this regard, actual methods vary between countries. Capital values are generally based upon market values, although some countries apply corrections to these market values (for example, use a specific proportion of the market value).

Most countries apply a large number of different reliefs under the property tax, for example, in the form of exemption of government property, highways, railways, and other transport or communication facilities, and mining, agriculture, and forestry industries. The subsidies implicit in this kind of treatment, not least with respect to agricultural land, have been increasingly criticized in a number of countries. As indicated above, many countries apply different tax treatment to residential and business property, with residential property usually subject to a more favorable treatment.

A particularly contentious problem in a number of countries has been the frequency and method used to update property values. Thus, in most developing countries, assessment of property values and updating seem to be the major issues. The unpopularity of this type of tax may in some countries be associated with infrequent updates of values, leading to large and abrupt increases in tax liabilities when updating actually takes place. Although property valuations are generally based on market prices, problems are also encountered during certain periods and in areas with modest turnover of property. State and central governments usually perform the valuation of property in order to achieve the necessary coordination between different areas, but the way in which and frequency with which it is done vary substantially across countries.

Although most of the revenue from property taxes generally accrues to subcentral levels of government, state or local governments do not always have complete discretion over the base or the rate. Central governments typically set the rules governing valuations and their frequency and determine exemptions and other reliefs. Also, the central government may impose restrictions on the variations in property tax rates. In practice, local government discretion may be limited in other ways, for example, in the form of earmarking of property revenues, or if higher rates adversely affect grants (as in the United Kingdom before 1989). In Italy, the central government sets a minimum rate for the property tax. If a municipality does not apply the floor rate, transfers to it from the central government are supposed to be reduced correspondingly. Thus, although most of the revenue from property taxes primarily accrues to subcentral authorities in most countries, the respective central governments are generally heavily involved in formulating and administering the provisions of the taxes.

Personal Income Taxes

Most countries assign all or a large proportion of personal income taxes to the central government. Exceptions include the Scandinavian countries, Switzerland, the Baltic countries, Russia, and the other countries of the former Soviet Union. Generally, there are advantages as well as disadvantages of using personal income taxes at the subcentral level. Among the advantages is the fact that personal income taxes generally are buoyant and thus capable of raising the necessary revenue, and in addition they are believed not to fall on businesses, thereby avoiding the risk of subcentral authorities, anxious to attract new industry, indulging in tax-cutting competitions with adverse effects on services provided.

One of the main disadvantages of a local income tax as the main revenue raiser is the fact that, depending on the level of the tax threshold, many people may not pay the tax, although they receive local services. 6 This could have an adverse impact on the way a decentralized system works and has been used as an argument for supplementing an income tax with other tax sources, thereby including the majority of the local constituency in the local tax net. In this regard, two schools of thought may be distinguished. First, many countries (including, for example, most Mediterranean countries and Austria) seem to place considerable weight on income redistribution and on making income tax systems easy to administer by setting a high tax threshold, thereby excluding a large proportion of the population from the tax net. In contrast, other countries (such as New Zealand, Switzerland, and the Scandinavian countries) generally put more emphasis on the inclusion of most of the population in the tax net by setting relatively low tax thresholds, so that more people share the cost of public services.

In the context of financing local governments, there seems to be a case for making a distinction between schedular and global income taxes, since schedular income taxes can in some cases be used by local jurisdictions without great difficulties, in particular if the taxes on, for example, interest income, dividend income, and wages and salaries are withheld at source and constitute the final tax paid. However, the more developed is a country, the higher is the likelihood that individuals receive income from different sources, and furthermore that these incomes are derived from different jurisdictions. This may move countries to prefer a global income tax system in which the different income sources are added together for each individual and the tax liability is adjusted according to individual circumstances. 7 For such a system to work well at the local level, it requires flows of information on personal income received from other jurisdictions and thus poses the risk of tax evasion. Against this background, it may be better to leave a global income tax base with the national government, which is in a better position to acquire the necessary information.

However, such a system can be combined with revenue sharing, such as is the case in India, where the states receive about 85 percent of total income tax revenue, allocated on the basis of population, tax effort, and a measure of backwardness. In Brazil, 44 percent of the income tax revenue is transferred to lower level governments under a tax-sharing arrangement, and in Poland, in 1992, 15 percent of the personal income tax revenue was shared with local governments. As part of a recent reform of intergovernmental fiscal relations, shared personal income taxes have also been introduced in Hungary (in 1991, 50 percent of the revenue accrued to local governments). Similar tax-sharing arrangements were also important elements in the financing reform in China in 1980 (under the present financing arrangements, local governments receive all of the yields from personal income taxes).

Notwithstanding these considerations, and to the extent that the administrative capabilities are present at the national level, there is a fairly easy and cost-effective way of taxing a global income tax base in local jurisdictions, namely for the local jurisdictions to use the same statutory tax base as for the national income tax (that is, overlapping taxes or piggybacking). This solution, which reduces administrative as well as compliance cost, is actually used in a number of countries (such as, for example, the Nordic countries and Canada, where the provincial tax is levied as a percentage of the federal tax). 8 However, although it introduces an additional complexity to the tax and thus offsets at least in part some of the administrative savings, some of the countries applying this system (for example, the United States) also use specific tax reliefs in their state and local tax systems. Thus, the extent to which countries using overlapping income taxes coordinate the taxes levied at different levels varies considerably. In the Scandinavian countries and Canada, for example, there is a high degree of coordination, while coordination is lacking in Switzerland and the United States.

Generally, because the system requires a fairly advanced administrative system with up-to-date recording of taxpayers’ residence, overlapping personal income taxes are generally seen only in developed countries. Combined with an efficient equalization system, such a system is seen, in the countries that apply it, to ensure that variations in tax rates across jurisdictions reflect similar differences in locally determined service levels. Even in industrial countries, however, the administrative recording requirements have been used as an argument against the workability of local income taxes (which, for example, is the case in the United Kingdom).

A special case of overlapping personal income taxes (or partly overlapping income taxes, if some differences in tax bases are allowed) arises when local income taxes, as in the United States, are deductible from federal income tax liability (deductibility is not applied in the majority of countries using overlapping personal income tax systems). The rationale of such a system is the protection it provides for the taxpayer against excessive aggregate marginal tax rates as a result of high local income taxes. An unwarranted side effect may, however, be the incentive for local governments to expand their expenditures, partly financed—at the margin—by nonresidents. It may also reduce the overall level of progressivity of the tax system.

Taxes on income deriving from the activities of small business establishments or from agriculture may often be imposed as efficiently by local governments as national governments, and in some cases local governments may even possess more information than national governments. However, since record keeping by small establishments is often modest or even absent, taxation of such business income has in many cases to rely on presumptive income, based for example on gross sales, on the floor space in which the activity takes place, or on other criteria (for example, in Hungary, the local business tax is levied on the gross turnover of businesses at a maximum rate of 0.3 percent). Taxes on income from small businesses, from self-employed, and from agriculture, with the revenues accruing mostly or solely to local governments, are well known in a number of Central and Eastern European economies in transition, including Poland and Romania, as well as in a number of developing countries, such as India.

Notwithstanding which level of government actually receives the revenue of personal income taxes, practice differs substantially across countries with regard to which level is responsible for the assessment and for the collection of the income taxes at the subordinate level. National or central government responsibility, or—at the most—state responsibility, seems, however, to be the main rule owing principally to the economies of scale involved in the administration of these taxes.

Sales Taxes

The popularity of assigning property taxes—and to some degree also income taxes—to subordinate levels of government is attributable in part to the fact that, with these taxes, differences in tax rates between areas are unlikely to cause serious problems owing to the relative immobility of the tax bases. In contrast, different sales tax rates between different jurisdictions can drive consumers (or rather their purchases) away from high tax areas, as is perhaps best reflected in the serious cross-border trade problems between countries with different tax systems and tax levels (such as between Canada and the United States, and between Ireland and the United Kingdom). A distinction must be made, however, between single-stage sales taxes, such as excises and retail taxes, and multistage sales taxes, such as turnover taxes and value-added taxes (VATs).

Retail sales taxes and excises levied on the final sale to the consumer can be given to local jurisdictions as a revenue source, provided that they do not levy these taxes with highly different tax rates. If they do, citizens will be encouraged to shop in other jurisdictions. The main factors determining the extent to which this will take place are the vicinity of other jurisdictions, the cost of travel, and the value of the goods purchased. 9 Another constraining factor for the use of such taxes at the local level with anything but a modest level of tax rates is the risk of tax evasion, which may be relatively more serious for these (single-stage) sales taxes, especially under high tax rates. However, the existence of, for example, both state and municipal sales taxes in many countries must reflect the fact that these caveats are not universally perceived as serious. Thus, in India, the main revenue source of the states is the sales tax. Turnover taxes and some excises are also important provincial revenue sources in Argentina.

A case can be made for distinguishing between excises on goods, which generally should be assigned to the central level to minimize tax exporting, and excises on selected services, consumed locally, and thus much less prone to tax exporting. Some countries, such as India, assign selected excises to the central government (combined with a tax-sharing scheme), and other excises to state and local governments. A number of countries use local excises or special taxes on automobiles or on fuels, which could be regarded as benefit taxes associated with the costs to local governments of maintaining roads. Municipalities in Brazil are allowed to levy a 3 percent tax on retail sales of fuels and gas. In Poland, own sources of revenue for local governments include a tax on automobiles.

Some countries combine earmarking sales taxes with tax assignment to different levels of government. In Russia, for example, a system of regional and federal road funds is in place, financed in part by excises on fuel and on vehicles, supplemented by taxes on registration and ownership of vehicles.

Sales taxes levied at the manufacturing level should, as a general rule, be assigned to the upper tier of government and to subordinate levels of government only where geographical areas are large.

There seems to be broad albeit not universal consensus in the literature that VATs are most appropriately assigned to the central level of government. This dictum rests on the fairly extensive administrative capabilities required to operate the tax (a requirement that is generally best met by central governments) in combination with the need to make the VAT neutral with respect to the spatial allocation of production and consumption, implying that—generally—the VAT should conform to the destination principle. 10 Implementation of this principle requires, however, border control between jurisdictions if the tax is to be levied by individual provinces or states. This would in most countries be neither feasible nor desirable because of the administrative costs implied and because of the impediments to the free flow of goods and services it would create. In addition, a subnational VAT system would pose problems with regard to which provinces or states should receive the revenues from VAT on imports, and which should bear the burden of VAT refunds on exports. 11 Following this kind of reasoning, comprehensive VATs should be left solely with the national government, as is, in fact, the case in most countries. In some countries (for example, China, Germany, and Russia), central VAT revenues may be shared with subnational levels, although this raises the same kind of problems referred to above, if the tax sharing is based on the derivation principle.

Similar considerations on different aspects of VAT design constitute important elements in the ongoing tax reform discussion in India, which contemplates introducing a comprehensive VAT to replace existing excises and sales taxes, with the aim of sharing the revenue between the three levels of government. However, one of the main questions is whether such a system could function properly without fundamental changes in the present system of intergovernmental fiscal relations in India. According to Bird (1993) , it could prove difficult to establish consensus on a formula distributing the VAT proceeds in a context of sharp regional inequalities as the one currently prevailing in that country. Bird also questions the rationale behind sharing the proceeds of any particular tax, because it would seem doubtful that the central government would go through the pain of increasing tax revenues that will accrue in large part to other governments. A more satisfactory alternative—according to Bird—would be to share with the states a fixed share of aggregate central tax revenues.

Brazil offers an example of a VAT assignment system that is generally believed to have had detrimental effects on economic performance. All three levels of government in Brazil are assigned taxing powers on consumption, but with different tax systems, and with the tax covering the widest base, the VAT-type ICMS assigned to state governments and not to the federal government. Furthermore, a large fraction of the federal government consumption tax (the IPI) is transferred to lower levels of governments under a tax-sharing arrangement. This particular design is believed to encourage tax competition between entities of government and to foster tax evasion, which is, furthermore, exacerbated by a large number of different tax rates and exemptions (see Chapter 18 for details).

Corporate Profit Taxes

There seems to be almost universal agreement that the taxation of larger businesses, and in particular corporate profit taxes, should be left to the national level and to provinces or states only where these are very large (as in Canada). This reflects the fact that the economic activities of corporations are typically much more diversified and complex, with factor inputs originating from a number of jurisdictions (and possibly also from abroad), and with sales similarly going to a multitude of jurisdictions. Depending on the nature of the specific markets in question, local taxes on corporate profits would to a large degree be exported or shifted to other jurisdictions in a nontransparent way, thus rendering the associated tax burden almost imperceptible to local citizens. In addition, a high local-tax rate may lead the business entity in question to move the tax base to other jurisdictions, either by physically moving the corporation or by adjusting the internal transfer pricing arrangements.

Leaving the taxation of corporate profits entirely in the hands of local governments would thus create serious informational problems because of the administrative issues associated with the allocation of taxable profits between different jurisdictions in cases of enterprises with economic activity spread over many localities. But also in this case these problems could, at least in part, be overcome by some form of overlapping tax bases between the national and the local level (piggybacking), although the room for tax-rate variations is much smaller for the corporate profits tax than for personal income taxes. In Canada, the base is harmonized to a considerable degree between the provinces and the federal level (although provinces do have the possibility of providing individual investment incentives), while provinces have the flexibility to vary rates. In Brazil, the states can levy a 5 percent surcharge on the corporate income tax.

Some countries have, with the above-mentioned problems in mind, chosen instead to allocate a fixed portion of the profit tax revenue originating within each jurisdiction to the local governments under a tax-sharing arrangement. Thus, Russia allocates 25 percentage points of the 38 percent tax rate on corporate profits to regional governments, while the remaining 13 percentage points remain with the federation. 12 Of the corporate tax revenue in Poland in 1992, 5 percent was shared with local governments. In Nigeria, a special system is in force according to which the federal authority has the legal jurisdiction over the company tax, but the states nevertheless collect the tax and retain the proceeds.

Payroll Taxes

Like VATs and corporate profit taxes, different types of payroll taxes are also generally seen as an appropriate revenue source for the central government only, because different payroll tax rates could drive employers, and jobs, away from high tax areas. In addition, tax exporting is probably significant in the sense that, first, part of the tax may be shifted to prices and thus borne by consumers outside the jurisdiction that receives the revenue, and, second, the tax may be levied on employees with residence outside the revenue-receiving jurisdiction. Thus, the tax may not be visible to the local taxpaying constituency, and the relationship may be weak between tax payments and services provided by jurisdictions. 13

Notwithstanding these general considerations, tax-sharing arrangements for payroll taxes actually exist in a few countries. A relatively small payroll tax is also levied by the states in Australia.

Natural Resource Taxes

Taxes on natural resources are generally perceived as poor candidates for local taxation, since normally the base of these taxes is very unevenly distributed across jurisdictions. In addition, extraction of economic rent from natural resources could be held to be a national prerogative, which should benefit the whole of the nation and not just selected fortunate regions. The taxes in question are also in many cases characterized by a high level of revenue volatility owing to price fluctuations. The associated uncertainty, it could be argued, should be absorbed by the central government, which generally has a number of alternative revenue sources at its disposition, and not by regional or local governments, which are meant primarily to conduct allocative functions (price fluctuations on oil, for example, have created sharp swings in the revenues of states in Nigeria). These theoretical considerations, however, do not take into account the important fact that, in practice, cultural and ethnic differences may be the reason for strong pressures toward regional independence, including regional control over natural resources, as is seen, for example, in Russia.

Alternatively, it could be held that, at least in part, these taxes should be considered as benefit taxes, that is, as payments for the benefits deriving from the provision by local or regional governments of the necessary infrastructure investment without which either exploitation of the natural resources would not be possible, or the return to the investments required could be significantly reduced. In other cases, the taxes may be considered as compensation for the environmental costs associated with the exploitation of natural resources. This might also constitute part of the reason why a number of countries actually operate tax-sharing schemes for natural resource taxation (see country chapters for details). In Russia, local governments in regions rich in natural resources benefit from the retention of a high share of these taxes. Previously, in Nigeria, all taxes accruing from oil production went to the states. In Argentina, a revenue-sharing scheme is in place for royalties on mineral extraction.

Import and Export Taxes

Import and export taxes, apart from being generally considered inferior to the taxes dealt with above, should always be imposed by the national government to reduce the possibility of introducing major distortions within the country through differential foreign trade taxes imposed by different jurisdictions. In fact, the large majority of countries assign import duties exclusively to the central government (Nigeria being one exception, with import tax revenue being shared). Nevertheless, in some countries, such as Russia, the formula for sharing important export tax receipts with regions from which the exports originate remains an important tax policy issue (because of the nature of the exports in question, these taxes may as well be considered special cases of taxes on natural resources). India operates a special tax on interstate sales with a maximum rate of 4 percent, and with a number of exemptions (see Chapter 21 for details).

Benefit Taxes and User Charges

In addition to what has been said above about specific sources of taxation, it is generally held that benefit taxes, license fees, and user charges should all be used to the maximum extent feasible at the local level because they are transparent, they minimize the risk of tax exporting, they generally do not involve problems of vertical or horizontal equity, and they increase economic efficiency. Although these charges are significant sources of revenue for the localities, they are generally modest compared with some of the taxes considered above.

Tax Assignment in Practice

A striking feature of the financing of subcentral levels of government is the significant variation in the level and composition of local government taxation across countries. This feature is illustrated in Tables 2 and 3 , which for a fairly limited sample of countries show the attribution of total tax revenues to subsectors of general government as percentage of total tax revenue, in federal as well as in unitary countries, and the composition of the tax revenue for each subcentral level of government with respect to different types of taxes (including revenues from the tax-sharing arrangements). These tables by their nature do not indicate the actual degree of state, provincial, or local autonomy over the tax revenues, which, as discussed this chapter, may vary considerably across countries.

Nevertheless, as the tables show, most countries have more than one subcentral tax (although the tables do not distinguish between cases where revenues are solely assigned to the subcentral level and where they are shared under tax-sharing arrangements), and this holds for industrial as well as for developing countries, and for federal as well as for unitary countries. Generally, the personal income tax seems (as expected) to be of greater importance for the subcentral level in industrial countries than in developing countries, although for example in most Anglophone countries the property tax is the dominant tax, especially at the local level (this holds in Australia, Canada, the United States, Ireland, New Zealand, and, until 1990, the United Kingdom).

In some, especially federal, countries, general consumption taxes and in some cases also excises play a considerable role, particularly at the state level (for example, in Austria, Brazil Canada, Germany, India, South Africa, Spain, and the United States). A predominant feature seems to be that these taxes are used by large countries with correspondingly large subcentral areas. Also, in some of these countries, consumption tax systems take the form of tax-sharing arrangements with little or no state or local discretion, as in the case of the Austrian and German VAT.

A common feature not shown in these tables is the dominant use of personal income taxes at the subcentral level as opposed to corporate income taxes, reflecting the fact that corporate income taxes are generally considered unsuitable at the subcentral level owing to the mobility of the tax base.

Although the property tax is among the most popular subcentral taxes, not least in federal industrial countries and unitary developing countries, its revenue measured as a percentage of GDP is generally modest and seldom exceeds about 3 percent. This is probably because it is a highly visible tax, it is hard to evade, there are problems associated with the valuation of property, and it is generally perceived as a regressive tax. For these reasons, the property tax has become increasingly unpopular politically, which may also help to explain why its importance as a revenue source has declined in many countries during the last decade or so.

Concluding Remarks

The theory on fiscal federalism provides some fairly broad guidelines with regard to which taxes can appropriately be assigned to subnational levels of government and which should be kept at the central level. However, although some general patterns in accordance with these guidelines can be identified in country practices, even fairly homogeneous countries at the same level of development have in many cases chosen different solutions to these problems. One of the main reasons for this is that the historical, geographical, ethnic, and constitutional character of each country has profound implications for the range of feasible and efficient tax assignment policies.

Some lessons may nevertheless be drawn from actual country experiences. First is the importance of tax administration: a decentralized fiscal system cannot function satisfactorily without the necessary administrative capabilities at the subcentral level. In other words, the design of tax systems should clearly be adapted to the level and quality of administrative resources that have been found politically appropriate to devote to the subcentral levels of government. Generally, the more complicated the tax in question is made for other reasons (for example, for reasons of revenue or equity), the stronger the argument for placing the tax with a higher or the highest tier of government. As a reflection of this “rule,” more complex systems of taxation are generally assigned to subcentral levels of governments only in more developed countries.

Second, in addition to the crucial question of the choice of tax sources at subordinate levels of government, actual experience indicates that a decentralized system will work satisfactorily only if state, provincial, and local governments are given at least one major own source of revenue, that is, a source of revenue over which they have autonomy to determine the revenue (assuming that this system is supported by adequate equalization of tax capacities and expenditure needs). Only then can a multilevel system of government promote accountability and ultimately economic efficiency.

Finally, there are obvious potential gains as well as risks associated with decentralizing taxing powers. The gains include improved mobilization of revenue sources and the potential efficiency gains alluded to above. The risks take the form of leaving the central government in a more vulnerable position with respect to its ability to conduct effective fiscal policies, especially for stabilization purposes.

This assumes chat there are no substantial externalities associated with the provision of local services, that the tax cannot be shifted to other jurisdictions, and that an efficient equalization scheme is in place.

For general expositions of the principles of fiscal federalism, see Oates (1972) and King (1984) .

See in particular King (1984) , Musgrave and Musgrave (1980) , and Oates (1972) .

Unless the areas in question are large as is the case in, for example, Canada and the United States.

As illustrated in Tables 2 and 3 , the importance of different tax sources varies considerably across countries. Based on more comprehensive information than that presented here, there seems to be a broad tendency for income taxes at subordinate levels of government to increase in importance with increasing level of development, although there are some exceptions to this rule.

In some countries, such as Finland and Norway, the income tax threshold in the local tax is much lower than in the central government income tax.

However, schedular mechanisms such as withholding or minimum contributions may be widely used under a global system for ease of administration.

This particular feature may increase the revenue elasticity of the subcentral tax compared with a normal flat rate system to the extent that subcentral governments will share the gains of any bracket creep effects in the federal tax.

This disregards the problems posed by mail order systems, particularly with regard to the control and setting of tax rates (in the United States, some of these problems have been addressed by applying the rates of the destination states to mail order sales). Although based on a fairly limited sample of countries, Table 3 seems to indicate that the degree of development is also important in this regard, in that there is a tendency for sales taxes to be of larger revenue importance for local governments in developing than in developed countries.

Which means that the tax is levied by the jurisdiction in which consumption takes place, independent of the origin of the goods (that is, expotts are exempt and imports are liable to tax), as opposed to the origin principle, according to which the VAT is levied by the jurisdiction in which production takes place, that is, interstate exports are taxed and imports are not.

In China and Russia, ail import VAT accrues to the federal government, and only domestic VAT revenues are shared with the regions.

Formally, the 25 percent local rate is a maximum, but the large majority of regions are believed to apply the maximum rate.

In the majority of countries, provision of regional or local government services is related to the residency of individuals.

Bird , Richard M. , 1993 , “Tax Reform in India,” Economic and Political Weekly , Vol. 28 ( December 11 ), pp. 2721 – 26 .

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Export Citation

King , David N. , 1984 , Fiscal Tiers: The Economics of Multi-Level Government ( London : Allen & Unwin ).

King , David N. , 1992 , ed. , Local Government Economics in Theory and Practice ( London : Routledge ).

McLure , Charles E. , Jr. , 1977 , “The ‘New View’ of the Property Tax: A Caveat,” National Tax Journal , Vol. 30 , No. 1 , pp. 69 – 75 .

Musgrave , Robert A. , and Peggy B. Musgrave , 1980 , Public Finance in Theory and Practice ( New York : McGraw-Hill ).

Oates , Wallace E. , 1972 , Fiscal Federalism ( New York : Harcourt Brace Jovanovich ).

Tanzi , Vito , 1996 , “Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects,” in Annual World Bank Conference on Development Economics, 1995 ( Washington : World Bank ).

Within Same Series

4 Tax Reform in Russia
PART I Theory
6 Recent Tax Policy Trends and Issues in Latin America
VII: Tax Reform and IMF Tax Policy Advice
Chapter 2. Modernizing the Tax Policy Regime
PART III Practice: Developing Countries
PART IV Practice: Economies in Transition
Chapter 3. Strengthening Tax Administration
IV: Income and Wealth Taxes
PART II Practice: Industrial Countries

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