Fiscal federalism and Fiscal Autonomy: Lessons for the UK from other Industrialised Countries

capital and labour imposes natural limits on fiscal autonomy. This is why most decentralised
taxation systems still assign the majority of ability-to-pay or redistributive taxes to central
government, especially taxes such as corporation taxes, which fall on the most mobile factor,
capital. Although income taxation tends to be used by sub-central governments in a large
number of countries, both federal (eg USA) and unitary (eg Denmark, Italy and Sweden), the
scope for this is either limited by law or by tax competition. Generally, sub-central
governments have to rely on benefit taxes or user charges (based on the benefit consumers
derive from local services), taxes on immobile factors such as property, or small changes in
ability-to-pay taxes (such as local income tax), which do not cause migration in the tax base.

Finally, a fourth argument against fiscal decentralisation is that it can generate administrative
complexity. In essence, it is argued that managing a national tax system is feasible at lower
cost and this implies that financing systems based on grants or tax-sharing arrangements are
optimal. In fact, in the case of any modern developed economy, this is a spurious argument.
There is no reason why one needs to decentralise the tax collection system, as evidenced by a
number of OECD countries which manage the collection of taxes shared by different
jurisdictions through a single national tax collection system. However, clearly if a national
collection system had to cope with a plethora of shared taxes between jurisdictions, this
would increase administrative costs.

A subtler version of this argument relates to the problem of transparency and complexity in
decentralised tax systems. A complex tax system, where various jurisdictions share the same
tax base, and where sub-central governments have important fiscal powers, can lead to less
transparency in the fiscal system. Voters may find it difficult to understand fully the
operations of the different levels of government (Tanzi, 2001) and this leads to less
accountability.

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