Costs and Benefits of Decentralization

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Costs and Benefits of Decentralization

• SATI Workshop on Tax Policy and Administration,
  University of Pretoria, June 18-20, 2006

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Choosing decentralization?

• Some countries are born decentralized
• Some choose to become decentralized
• And some have decentralization thrust upon them
  for many diverse reasons
• But no matter why a country is (to some degree)
  decentralized, it has to work out just what
  decentralization means and how to do it.

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What is Decentralization?

• Deconcentration decentralizing the central
  administration
• Delegation contracting-out central policy
  implementation to local governments
• Devolution letting local governments decide
  what to do and how to do itwithin limits?

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Modes of Decentralization

• Administrative decentralization the centre
  decides, the regions and localities administer
• Political decentralization sub-national
  governments decide
• Fiscal decentralization
• Done right how to make political
  decentralization efficient and effective
• Done wrong how to make a mess of things

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Potential Benefits

• Efficiency gains
• The right services to the right people in the
  right amounts
• Creating incentives for growth
• Laboratory for innovation
• More heads are better than fewer
• Learning from successand failure
• Revenue mobilization broaden the base?
• Political aspects
• Improve governance
• Restoring (or redressing) regional balance
• Helping to build (or rebuild, or hold together) a
  nation

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Potential Costs

• Macroeconomic concerns
• Runaway deficits
• Unsustainable borrowing
• Equity concerns
• More local revenues increase regional imbalance
• Is local control helpful or harmful to the poor?
• Efficiency and effectiveness can LG really do
  the job?
• Capacity can LG really do the job?
• Critical infrastructure from a national
  perspective
• Corruption more or less?
• Political concerns exit and loyalty

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Striking the Balance

• Much discussion but little solid evidence
• Complex, multi-faceted issue
• Some general lessons
• Make rules clear to all
• Finance follows function
• Need for financial control system
• Hard budget constraint - accountability
• Some local revenue flexibility
• Get intergovenmental transfers right
• Borrowing keep an eye open for problems
• Asymmetry the big, the small and those
  in-between
• Universal problems, local solutions
• Strategy, process (buy-in), time..

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A Separate Question Local Tax Administration

• Is it necessary?
• No. Economic and political accountability does
  not require local tax administration.
• Is it desirable?
• Possible informational and accountability
  advantages.
• If center does it, will LG see the money?
• Is it feasible?
• Constraints on local capacity.
• Consider splitting the task?

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Dividing Tax Administration

• Central valuation and central collection
• Pakistan, France, Jamaica
• Central valuation and local collection
• U.K., Colombia
• Local valuation and central collection
• Tunisia, Slovenia
• Local valuation and local collection
• India, Mexico, U.S.

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Property Tax Administration

• Who sets the rate?
• Who identifies the base?
• Who assesses properties?
• Who decides appeals?
• Who sends the bills?
• Who collects payments?
• Who enforces the tax?
• Who receives the revenue?

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Some Questions for Discussion

• What role should LG have in taxation?
• In deciding what taxes to levy?
• In deciding what tax rate to impose?
• In identifying and assessing taxpayers?
• In billing and collecting taxes?
• If there is a separate LG tax office, what should
  its relations be with CG tax administration?
• None?
• Information sharing?
• Support and training?
• Division of labour?