fiscal federalism: principles, evidence from canada and elsewhere and a proposal for scotland spif,...
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Fiscal federalism:principles, evidence from Canada and elsewhere and a proposal for
ScotlandSPIF, Edinburgh, October 2008
François VaillancourtEconomics, Université de Montréal
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Principles
• Number of sub-national entities(SNEs)/ borders/size
• Responsibilities of central and SNEs• Financing of central and SNEs– Share of own and transfered revenues– Type of own revenues– Type of transfers– Borrowing authority
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Numbers/ borders/ size
• Great variability by federation driven by origin of federation with borders historical/drawn
• Issues of relative power ;depends on representation at center mechanism and on degree of autonomy
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Responsibilities
• Subsidiarity principle– Economies of scale (broadcasting) and
externalities (pollution, mobile labour force)=>central G
– Differences in consumption patterns (taste,climate,geography) based on regional divisions=>SNEs
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Financing
• SNEs marginal revenue source should be own source; rate freedom/ base can be national/ collection?
• SNES taxes should be on less mobile bases: labour as opposed to capital
• Natural resource revenues at centre for sharing
• Transfer design depends on importance of national goals and degree of solidarity
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Number/size of entities
– USA 50 mean pop 6 000 000 historical+federal lands
– Switzerland 26 mean pop 300 000 historical+ linguistic(Jura)
– Canada 10(+3) mean pop 3 000 000 historical+ linguistic
– Belgium 3+3mean pop 3 500 000 layered system region+language
– Spain: 17(+2) mean pop 3 000 000 province originated
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Responsibilties
• Similar in the five countries (4 federations).• Central has foreign affairs ,defence,money
and banking some transportation and some or all transfers to individuals
• SNEs have education, health(less in USA-Medicare), local issues
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Canada:% are for own revenues;% spending Fed<,Prov>
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Who does what
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Financing-Own
• Differences appear here• Ca, USA and Sw have SNEs with full range of
taxation powers :base setting, rate setting and collection for major taxes: PIT,CIT G&S
• Be and Es have some own source revenues and limited powers on rates for PIT and do not exercise them
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Financing transfers
• Important differences here– Canada equalisation of resources not needs and
population based with few conditions for transfers; laid back federalism
– USA no equalisation and many conditional transfers; meddling federalism
– Sw ; equalisation of resources and needs and targeted transfers + other(central bank);
– Be and Es equalisation+ others
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Canada; revenue sources are as follows
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Canada Federal transfers
• Small (specific historic) transfers of 50/ 50 type: offical languages, legal aid, social housing… Since 1900 mainly 50/50 funding
• Equalisation starts in 1957 to facilitate tax autonomy of provinces
• Health Social and post secondary education start in the 1955-1970 period. Move from 50/50 funding to block grants in 1977 with various configurations. Population based
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Equalisation-funded by
• Gross equalisation funded from general federal revenues
• No provincial contributions• No access by federal government to resource
royalties-provincial revenues• Three year moving average lagged 2 years• 10 province standard /NO expenditure needs
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Equalisation-given out as
• Representative tax system approach: differences in tax capacity measured at national rate per capita=> Total
• ∑ accross recipients=>total payment by federal government
• Five broad bases used (50% of natural resources)
• Fiscal capacity cap; any recipient< poorest non recipient
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Issues
• Differences in taxation with Alberta lower(flat 10% PIT) creates tax competition and capitalisation in housing prices
• Disparities due to oil/ gas prices =>creates tensions between have / have not provinces in attracting public sector(health) employees increases equalisation payments funded by federal revenues not from these resources but from Ontario
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Issues-2
• Asymetric treatment of Québec small de jure and large de facto ( social security , immigrant selection, parental leave) thus West Lothian asymetry is accepted;
• Provincial PIT is collected by federal 9/10,CIT 8/10 Revenue Québec cost ≈ 900 million$
• Five province collect own sales tax, Québec collects federal GST, federal collects joint federal/provincial HST
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Per capita fiscal balance, Ontario and Québec, net of deficit
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
En
dolla
rs c
oura
nt
Québec Ontario
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Scotland
• Why is every thing paid for by UK; no marginal cost to Scottish taxpayer –long live Lord Barnett!
• Incentive to spend !• Why no political will to use 3p to the £ ?• Similar situation in Belgium and Spain where
AC have granted tax breaks• Catalonia complains but does not vary
taxation or spending20
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Canada
• 1954 Québec takes tax room in personal income tax field
• Equalisation introduced in 1957 to facilitate provincial tax autonomy
• By 1972 all other provinces do that and are willing to raise / lower taxes to provide differentiated
• Recent years sees erosion of credo of provincial tax autonomy
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Conclusion-Policy proposal• Require Scotland to finance 50% of spending
for individuals (education… 2009 amount)by raising its own PIT;
• Inland Revenue collects it at marginal cost using UK income definition
• Initial tax rates set to zero not existing(UK) one so decision must be taken –avoid the Spanish laziness of tax concession
• Equalization introduced at same time to reduce risk/ make solidarity explicit
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