The Forum of Federations Handbook of Fiscal Federalism

This open access handbook compares fiscal federalism arrangements in eleven federal/ decentralized countries. Each chapter examines an individual country, laying out its constitutional design as relates to fiscal powers and the division of those powers between levels of government. Specifically, the analyses consider powers of taxation, spending, regulation, and more. Focusing on Australia, Brazil, Canada, Ethiopia, Germany, India, Italy, South Africa, Spain, Switzerland, and the United States, the contributors provide a fascinating account of how federal countries are confronting the traditional challenges of conflicts over division of fiscal powers while also coping with the ongoing challenges of globalization and citizen empowerment that arise from the information revolution. As a companion to the Forum of Federations Handbook of Federal Countries 2020 , this volume considers how relationships and roles in different orders of government are being reshaped, and shows how local solutions inspired by global principles help strengthen government accountability and improve citizens’ quality of life. This is an open access book. Foreword Introduction Contents Notes on Contributors List of Figures List of Tables Australia 1 Overview of Australia’s Federal System 2 The Structure of Government and Expenditure Responsibilities 2.1 Commonwealth Power of Expenditure 2.2 Commonwealth Power to Grant Funds to States 3 Taxation in the Australian Federation 3.1 Commonwealth Taxing Power 3.2 State Taxes 3.2.1 Why No State Income Taxes? 3.2.2 Why No State Sales Taxes? 3.3 Local Government 4 Federal Economic and Fiscal Coordination 4.1 National Economic and Debt Management 4.2 From The Council of Australian Governments to the National Federation Reform Council 4.3 The Intergovernmental Financial Agreement 5 Horizontal Fiscal Equalisation 5.1 History of Equalisation and the Commonwealth Grants Commission 5.2 The “Reasonable Equalisation” Approach and Top-Up for Western Australia 5.3 Lack of State Tax Reform 6 Vertical Fiscal Imbalance 6.1 Australia’s High Vertical Fiscal Imbalance 6.2 Reforming the GST 6.3 A New Approach to Revenue Sharing Between the Commonwealth and the States 6.3.1 Inspiration from the German Revenue Sharing System 6.3.2 Establishing the Income Tax and GST as “Joint Taxes” in Australia 6.3.3 Towards Limited Sharing of the Income Tax Base? 7 Federal Fiscal Policy for Indigenous Self-Government 7.1 Australia’s Failure to Recognise Indigenous Fiscal Self-Government 7.2 Inspiration from Canada for Recognising Indigenous Fiscal Self-Government 8 Future Directions References Brazil 1 Introduction 2 The Structure of Government and the Assignment of Resources and Responsibilities 3 Intergovernmental Transfers and Fiscal Disequilibria 4 Fiscal Federalism and Macroeconomic Management 5 Challenges to Fiscal Federalism: Institutional Rigidity, Conflicts and Impediments to Reform References Canada 1 General Features of the Country 2 The Allocation of Expenditure Responsibilities 3 Taxation Powers 4 Intergovernmental Fiscal Transfers 4.1 Equalization 4.2 Specific-Purpose Federal Transfers to Provinces 4.3 Territorial Formula Financing 4.4 Provincial Transfers to Municipalities 4.5 Vertical Fiscal Gaps 5 Macroeconomic Management 6 Response to the Covid-19 Pandemic 7 Challenges to Canadian Fiscal Federalism References Ethiopia 1 Introduction 2 Federalism in Ethiopia 3 The Structure of Government 4 Social and Economic Development 5 Allocation of Expenditure Responsibilities 6 Taxation Powers 7 Intergovernmental Fiscal Transfer and Revenue Sharing 8 Macroeconomic Management 9 The Ethiopian Federal System and Response to Pandemics: Lessons from Coronavirus 10 Concluding Remarks References Fiscal Federalism in Germany 1 Overview of the Country 2 The Division of Fiscal Powers 3 Fiscal Federalism and Macroeconomic Management 4 (Fiscal) Federalism During the COVID-19 Pandemic 5 Revenue-Raising Responsibilities 6 Intergovernmental Fiscal Transfers 7 The Way Forward References Republic of India 1 Introductory Overview 1.1 Legal System 1.2 Political Parties 1.3 Social Norms and Restraints 1.4 Civil Society 2 Citizens’ Charter 2.1 Basic Economic Indicators 3 The Structure of Government and Division of Fiscal Powers 3.1 System of Governance 3.2 Division of Fiscal Powers 3.3 Sharing of Central Taxes 3.4 Types of Fiscal Transfers in India 3.5 Union Finance Commission (UFC) 3.6 Constitutional Status of Local Governments and their finances 3.7 Finances of the Local Governments 4 Fiscal Federalism and Macroeconomic Management 5 Fiscal Equity and Efficiency Concerns and Intergovernmental Fiscal Transfers 6 Covid-19 Pandemic and Fiscal Federalism 7 Fiscal Federalism Dimensions of Public Management Framework 7.1 The Way Forward References Italy 1 Balancing an Inverted Pendulum: Basic Data and Facts 2 Framing Regional Economies: A Look Back and Forth 3 Explaining “Federal” Regionalism: Determinants and Their Implications 4 Discussing the Rules of the Game: The Allocation-Scheme 5 Discussing the Rules of the Game: Spending Autonomy 6 Discussing the Rules of the Game: Taxation Responsibilities 7 Discussing the Rules of the Game: Intergovernmental Fiscal Transfers and Revenue-Sharing 8 Assessing Recent Trends: The Persistent Lack of Coordination 9 Evaluating the Covid-19 Outbreak Phase: The Ultimate Stress Test References South Africa 1 Introduction 2 The Structure of Government 3 Taxation Powers at a Glance 4 Anatomy of Fiscal Transfers and Revenue Sharing 5 Macroeconomic and Fiscal Policy Management 6 Intergovernmental Response to COVID-19 in South Africa 7 Successes and Challenges of Fiscal Federalism in South Africa Annexure A References Spain 1 Introductory Overview of the Country 2 The Allocation of Expenditure Responsibilities 3 Taxation Responsibilities 3.1 Revenue Assignments of the Autonomous Communities: The Common Regime 3.2 Revenue Assignments of the Autonomous Communities. The Charter System 3.3 Revenue Assignments of Local Governments 4 Intergovernmental Fiscal Transfers and Revenue-Sharing 4.1 Transfers to Regional Governments 4.2 Transfers to Local Governments 5 Macroeconomic Management 6 Challenges to Fiscal Federalism References Switzerland 1 Introduction 2 Switzerland: Facts and Figures 3 The Structure of Government and the Division of Fiscal Power 3.1 Federal Scope of Responsibilities and Its Evolution 3.2 Issues with Centralization 4 Fiscal Federalism and Macroeconomic Management 5 Fiscal Rules and Referenda 5.1 Favorable Evidence on Budget Rules... 5.2 ...and Fiscal Referenda 6 Public Revenue 6.1 Cantons Exploit Tax Autonomy 6.2 Largely Benevolent Tax Competition 6.3 Corporate Tax System Under Change 7 Redistribution Framework 7.1 The Widely Successful Reform of the Equalization Scheme 7.2 Disincentives and Flaws of Redistribution Mechanism 7.3 The Effect of Direct Democracy and Fiscal Federalism on Income Inequality 8 Conclusion References United States 1 Introduction 2 Revenues and Expenditures 3 Intergovernmental Grants 4 Trends 5 Diversity 6 Challenges and Future Directions Afterword References Comparative Perspectives on Fiscal Federalism Systems 1 Expenditure Responsibilities 1.1 Decentralization, Concurrent Responsibilities, and Central Government Influence 1.2 Distribution of Expenditures 1.3 Asymmetry in the Allocation of Responsibilities 2 Taxation Powers and Revenue Decentralization 2.1 Tax Decentralization and Revenue-Raising Autonomy 2.2 Asymmetries in Taxation Powers 2.3 Shared Taxes and Formula-Based Revenue-Sharing 2.4 Own-Source Revenues of Subnational Governments 2.5 Natural Resource Taxation 2.6 Vertical Fiscal Gaps 3 Fiscal Transfer Systems 3.1 Subnational Governments’ Reliance on Transfers 3.2 Equalization 3.3 Decision-making Process for Transfer Systems and Advisory Fiscal Commissions 4 Macroeconomic Management 4.1 Tax Policy Harmonization 4.2 Restrictions on Borrowing at Subnational Level 4.3 Fiscal Rules, Coordination, and Fiscal Discipline 5 Challenges to Fiscal Federalism Systems References Index