Does Conditionality Mitigate the Potential Negative Effect of Aid on Revenues?

Abstract

This paper assesses whether conditionality in IMF-supported programmes has helped offset the potential negative effect of foreign aid on tax revenues. The analysis – carried out on panel data covering 1993-2012 for 111 low- and middle-income countries – shows that growing use of revenue conditionality by low-income countries partially offsets the depressing effect of foreign grants on tax revenue, particularly on taxes on goods and services. The impact of conditionality is strong in countries where aid dependence is high and where institutions are strong, suggesting that revenue conditionality cannot substitute for weak institutions in mitigating any negative effect of aid on tax revenue collection.     

Managing Local Intergovernmental Revenues: The Imperative of Diversification

Abstract

Municipal governments have employed a variety of strategies to address their ongoing revenue crises throughout the past several decades. One such strategy that has been employed with great consistency is the use of intergovernmental revenues (IGR). Given this trend, coupled with the fact that we know little about the dynamics of IGR, this paper presents one of the first multi‐year examinations of its use at the local level. Using data from 76 villages and cities in Cook County, IL (greater Chicago) for 1996–2000, we examine IGR use from the perspective of revenue diversification. The analysis indicates that during this period, local governments in Cook County (1) diversified their own‐source revenues and decreased dependence on the property tax; (2) maintained a consistent dependence on IGR; and (3) diversified and significantly altered their IGR structures. We also examine the demographic and organizational correlates of IGR diversification, and find it to be unrelated to characteristics such as population, property tax base, professional administration, and organizational capacity. As a result, we conclude that IGR diversification is a strategy that ought to be considered by all municipalities regardless of size or structure.     

Incoherence between Tax and Development Policies: the case of the Netherlands

Abstract

This article discusses incoherence between tax and development policies, a relatively new area in the debate on policy coherence for development, using a case study of the Netherlands. Dutch business entities play a key role in tax avoidance structures of multinational corporations. We argue that the Dutch tax regime facilitates the avoidance of substantial amounts of tax revenues in developing countries when compared to the Dutch aid budget. As domestic tax revenues are an important source of financing for development, this suggests that the Dutch tax policy is incompatible with the Dutch policy on development co-operation. The lack of policy coherence is largely unintended but it has structural and political causes.     

The Effects of the Value-Added Tax on Revenue and Inequality

This paper examines the impact of the introduction of the value-added tax on inequality and government revenues using newly released macro data. We present both conventional country fixed effect regressions and instrumental variable analyses, where VAT adoption is instrumented using the previous values of neighbouring countries’ VAT systems as an instrument. The results reveal – in contrast to earlier work – that the revenue consequences of the VAT have not been positive. The results indicate that income-based inequality has increased due to the VAT adoption, whereas consumption inequality has remained unaffected.     

Taxing the Informal Economy: The Current State of Knowledge and Agendas for Future Research

Abstract

This paper reviews the literature on taxation of the informal economy, taking stock of key debates and drawing attention to recent innovations. Conventionally, the debate on whether to tax has frequently focused on the limited revenue potential, high cost of collection, and potentially adverse impact on small firms. Recent arguments have increasingly emphasised the more indirect benefits of informal taxation in relation to economic growth, broader tax compliance, and governance. More research is needed, we argue, into the relevant costs and benefits for all, including quasi-voluntary compliance, political and administrative incentives for reform, and citizen-state bargaining over taxation.     

Policy design and public support for carbon tax: Evidence from a 2018 US national online survey experiment

Public support for policy instruments is influenced by perceptions of how benefits and costs are distributed across various groups. We examine different carbon tax designs outlining different ways to distribute tax revenues. Using a national online sample of 1,606 US respondents, we examine support for a $20/ton carbon tax that is: (1) revenue neutral: revenue is returned to citizens via tax cuts; (2) compensation-focused: revenue is directed to helping actors disproportionately hurt by the tax; (3) mitigation-focused: revenue funds projects reducing carbon emissions; and (4) adaptation-focused: revenue is directed to enhancing community resilience to extreme weather events. We find devoting revenue to mitigation raises overall support for carbon tax by 6.3 per cent versus the control (54.9 per cent) where no information on spending is provided. Other frames raise support in specific subgroups only. Revenue neutrality raises support among lower-income households (+6.6 per cent) and political independents (+9.4 per cent), while compensation increases support among lower-income repondents (+6.1 per cent).     

‘Faulty’ fiscal illusion: examining the relationship between revenue diversification and tax burden in major US cities across the economic cycle

We investigate how revenue diversification affects tax burden in major U.S cities as it interacts with fiscal balance reported in the general fund over the economic cycle. We find that more diversified cities have higher tax burdens, and that this effect is strengthened when cities maintain a large surplus in the general fund. We also test models of revenue diversification's impact on tax burden using data from 1995 to 2010, separated into good fiscal years (1995-2001, 2004-2007, 2010) and bad fiscal years (2002-2003, 2008-2009). Model estimates show that greater revenue diversification leads to higher tax burden in bad fiscal years but this outcome is not found in good fiscal years. Cities seek greater revenue diversification when they are experiencing economic recessions. This study contains important implications for local financial management and contributes to the literature on revenue diversification and tax burden.     

Tax Collection in Developing Countries – New Evidence on Semi-Autonomous Revenue Agencies (SARAs)

Abstract

Over the last two decades, semi-autonomous revenue agencies (SARAs) have become a key element of public administration reform. They are supposed to improve revenue mobilisation and stabilise state–taxpayer relations. But do SARAs really outperform conventional tax administrations? This article argues that they do. Presenting the results of a panel analysis of local tax collection in Peru between 1998 and 2011, it shows that municipalities with SARAs collect more revenue than those with conventional tax administrations. The results also indicate that local revenue is more stable in municipalities with SARAs, which is good for budget policy and planning.     

Reforming Serbia’s Local Government Finance System*

Abstract

Approximately 30 percent of all local government revenues in Serbia come from shared sales taxes. In the immediate future, the Government will have to replace sales taxes with a value added tax in order to meet EU norms. This will require a fundamental overhaul of Serbia’s intergovernmental finance system because unlike sales tax, the VAT cannot be shared on an origin basis. This paper outlines the origins of Serbia’s current intergovernmental finance system, summarizes its strengths and weaknesses, and then, in light of the necessity of change, sketches a set of reform proposals. These include creating a formula-based equalization grant funded by a fixed percentage of national budget revenues; introducing the legal possibility for block grants, categorical grants, and grants for delegated functions to fund the devolution of new responsibilities to local governments and to support specific (investment) programs; and restoring local government control over Serbia’s ad valorem property tax.     

Local Governments’ Responses to Revenue Changes: The Effects of Unreserved General Fund Balances

ABSTRACT

Volatile revenues affect the quality and consistency of municipal service provision. This article investigates how cities use unreserved general fund balances to mitigate annual expenditure fluctuations when confronted with volatile revenues. Based on the analysis of a panel dataset of over two thousand American cities from 2003 to 2011, the fixed-effects regression results suggest that unreserved general fund balances reduce municipal expenditure fluctuations on a year-to-year basis. The expenditure-smoothing effects were more pronounced when municipal governments experienced large revenue changes. Results are robust when excluding large cities, using different cutting-points to define ‘moderate’ or ‘large’ revenue changes, and in recession and non-recession years. This article contributes to the local expenditure stabilization literature by recognizing the unreserved general fund balances’ expenditure-smoothing effects during ‘non-rainy days.’ It adds empirical evidence to the organizational theory that financial slack works as a crucial buffer against external changes and provides managerial discretion to local administrators.     

Biased Budgeting in the Public Sector: Evidence from Italian Local Governments

Abstract

The purpose of this paper is to analyse, in terms of presence, determinants and purposes, the misrepresentation of expected revenues during budget formulation and the misrepresentation of actual revenues during budget execution. To this end, we use six-year panel data from Italian municipalities with populations above 15,000. Our results suggest that overestimations of current revenues are more frequent than underestimations, during both budget formulation and budget execution. In terms of determinants, our results highlight the impact on revenue misrepresentation of both political orientation and fiscal stress. Finally, in terms of purposes, we show that revenue underestimation during budget formulation and revenue overestimation during budget execution may contribute to the formation of surpluses. The former, in particular, may allow mayors to create a ‘war chest’ in non-election years, which can then be used to increase net borrowing on the eve of elections.     

Incumbents and Innovations under Decentralization: An Empirical Exploration of Selected Local Governments in the Philippines

Abstract

Like in other developing countries, many local governments in the Philippines have become innovative under decentralization. We investigate here the drivers of local innovations, with focus on quality of incumbent leaders, their political incentives and fiscal resources. We applied Poisson regressions on a survey data comprising 209 innovations introduced in 48 cities and municipalities during the period June 2004–June 2008. The statistically significant factors are the mayor's competence (age, educational attainment), re-election status and term in office. Innovations appear to increase with local fiscal resources but at decreasing rate. Access to information appears not to matter much. However, these factors, including poverty rates, vary in relative importance in explaining innovations in expenditure services, and in revenue and public administration services. Some policy inputs are suggested.     

Meeting the challenge: state revenue raising

Recent trends in state tax revenue reveal that overall reliance of states on taxes have been declining for the last 43 years. Faced with reduction in tax revenues, states have restructured their tax systems to meet public demand for more services. State income taxes are the one type of tax that has risen consistently. What causes state policy makers to rely on this type of tax? This research addresses this question.     

The Fiscal Effects of Aid in Ethiopia: Evidence from CVAR Applications

ABSTRACT

This article explores the fiscal effects of aid in Ethiopia using the Cointegrated Vector Auto-Regressive (CVAR) methodology to model complex long-run and short-run dynamics. We use national data for 1961–2010, including a measure of aid capturing flows through the budget as measured by the recipient. The data suggests three main conclusions on the long-run equilibrium. First, government long-term spending plans are based on domestic sources, treating aid as an additional source of revenue. Second, both grants and loans are positively related to tax revenue. Third, aid is positively associated with spending, with a particularly strong relation between capital expenditure and grants. Overall, our results show that aid in Ethiopia had beneficial fiscal effects.     

The impact of functional responsibility and state legal constraints on the “revenue-debt” packages of U.S. Central cities

State governments have the power to restrict the revenue and debt sources available to their municipalities. States also have the power to assign functional responsibilities to their municipalities - - some of which can be extremely burdensome financially (educatin; welfare; hospitals). This research examines the effect of these state constraints on: (1) the revenue-debt use patterns; and (2) the fiscal condition of 243 U.S. central cities (FY 1974, FY 1975, 1976).

The results show that the revenue/debt use patterns of cities vary signigficantly according to the restrictions imposed by the state on their taxing, borrowing, and functional responsibility powers. In addition, revenue/debt use patterns differ among ciites experiencing varying levels of distriess. Severely distressed cities are more dependent on external revenue sources (federal, state). They are less capable of generating revenue at the local level and are less flexible in their use of local revenue soruces, depending more hevily on the property tax and less heavily on nonproperty tax and nontax revenue sources than healthier cities. They are also found to be more reliant on full faith and credit (property tax-backed) long-term debt and on short-term debt than the more prosperous cities.

Cities in states imposing heavy restrictions on use of property tax and full faith and credit long-term debt sources but imposing few restrictions on municipa; nonproperty taxing powers are generally the healthiest fiscally. Such state policies have effectively enhanced municipal diversification of both traditional revenue sources and debt sources.

The major significance of this research is the demonstration that state governments have within their policy-making power the ability to affect the fiscal dependency level of their respective municipalities. An activist role is necessary on the part of state governments if they wish to increase their role in municipal fiscal affairs relative to that of the federal government.     

Local Fiscal Stress in Sub‐Saharan Africa: The Kenyan Example

Abstract

This article identifies the fiscal weaknesses of local government in Africa, with concentration of the fiscal stress that is endemic to their condition. It then examines Kenya, as a case study in sub‐Saharan Africa. It continues to focus down on three Kenyan cities—Nairobi, Mombasa, and Kisumu, and identifies their six major revenue sources: land based revenues, regulatory revenues, income‐based taxes, service revenues, user charges, and government grants. Although some of the data is problematic, it is possible to determine several reasons for local fiscal stress. These reasons include limited access to stable financial resources, unstable national economic performance, centralized governmental control, mixed results of decentralization, and institutional and managerial weaknesses, including corruption in the collection and use of resources. Four recommendations are advanced to help these local governments: the development of local credit systems, the use of non‐governmental organizations, the clarification of the use of foreign aid, and the development of a greater capacity for governance. This articles main theoretical contribution is the development of an analytic framework for examining the reasons for fiscal stress in sub‐Saharan Africa. By examining revenue and expenditure patterns of the three localities, the article develops a data set that highlights some of the reasons for local government financial problems—the governments do not know how much revenue can be collected from a particular revenue source, they do not have records of existing sources of revenue, and they only collect about 40–60% of their estimated collections.     

A Survival Analysis of U.S. Municipalities in Fiscal Distress

This article uses survival analysis to investigate fiscal distress in U.S. municipalities. We hypothesize that fiscal distress is positively correlated with revenue concentration and debt usage, and negatively correlated with administrative costs and entity resources. We develop a model that can predict the likelihood of fiscal distress and correctly classify up to 86 percent of the sampled governments. The model enables users to analyze the impact of a change in the risk factors. Fiscal distress can be reduced most effectively by increasing tax revenues as a percent of total revenues or decreasing total debt as a percent of total revenues.     

Semi-Autonomous Revenue Authorities in Sub-Saharan Africa: Silver Bullet or White Elephant

A major component of tax administration reform in sub-Saharan Africa for the last 30 years has been the creation of semi-autonomous revenue authorities (SARAs). The effects of their creation on revenue performance have been much debated, although there are only a few quantitative studies. The core argument of this paper is that existing research suggesting diverse and contradictory outcomes has not taken account of trends in revenue performance in the years before the establishment of SARAs. Allowing for this revenue history our analysis, based on 46 countries over the period 1980–2015, provides no robust evidence that SARAs induce an increase in revenue performance. This does not imply that SARAs may not provide benefits for tax collection, but they do not demonstrably increase (or decrease) revenue collected.     

REVENUE SCARCITY AND GOVERNMENT OUTSOURCING: EMPIRICAL EVIDENCE FROM NORWEGIAN LOCAL GOVERNMENTS

It is often said that ‘necessity is the mother of invention’. In this article, we assess whether this also applies to the design of public authorities' service provision. In particular, we evaluate whether revenue scarcity – as an indicator of fiscal stress – induces government outsourcing. In contrast to previous studies, we exploit arguably exogenous variation in local government revenue across time and space to derive stronger inferences on the role of revenue scarcity for outsourcing. Using data from Norwegian local governments covering the period 1995–2012, our main results indicate that a decrease in local government revenues is linked to more outsourcing of both infrastructure and support services.     

Investigating Sales Tax Revenue Competition Among Principal Cities and Their Neighboring Cities in Texas

ABSTRACT

While research has explored the economic importance of principal cities on regional economies, little is known about the short-run and long-run dynamic relationships between principal cities and their neighboring cities as it pertains to their sales tax revenue elasticities and the subsequent affect this has on horizontal tax competition. Using vector error correction models on data from six principal cities in Texas, the findings of this study suggest that the relationship between principal and neighboring cities is highly dynamic and unique for each principal city. The study recommends that local economic policies should reflect these unique relationships.