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

Appendix

Construction of the Index of Fiscal Control [as used in Figure 2]

The index of fiscal control comprises a weighted average index measuring the tax raising
autonomy of state and local governments, multiplied by the magnitude of these respective
taxation revenues. The information required to construct the weights is derived from OECD
(1999).

Indicators of Tax autonomy	Weight
State/Local government free to set both tax rate and tax base.	1
State/Local government free to set tax rate only.	08
State/Local government free to set tax base only.	06
State/Local government able to determine revenue-split in tax sharing arrangement with higher levels of government._______________________________	05
Revenue split in tax sharing arrangement with higher level of government requires consent of State/Local government.___________________________________	01
Revenue split in tax sharing arrangement is fixed, but can be unilaterally altered by higher level of government._______________________________________________	03
Revenue split in tax sharing arrangement is determined by higher level of government in their annual budget.___________________________________________	01
Higher level of government sets both tax rate and base.	0

For example:

For Poland, a country with a central and local government structure, 45% of taxation is in
category (b), 1% category (c) and 54% category (d.3), the index is obtained as follows:
Index of fiscal control = 0.45*0.8 + 0.01*0.6 + 0.54*0.3 = 0.528

Alternatively, for a country with a central, state and local government structure, eg.

Switzerland the index takes account of the ratio of state vis-à-vis local taxation revenues:
Communities: 0.97*0.8 + 0.03*0.3 = 0.785

Cantons: 0.89*1 + 0.06*0.4 + 0.05*0.3 = 0.929

Index of fiscal control = (16/38)*0.785 + (22/38)*0.929 = 0.868.

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