Local taxation: an economy-based guide

Agence Française de Développement

working paper

November juillet 2007 2009

87

Local taxation: an economy-based guide

Guy Gilbert, Full Professor at the Ecole normale supérieure (ENS), Cachan (gilbert@sociens.ens-cachan.fr) Contact: Réjane Hugounenq, Research Department, AFD (hugounenqr@afd.fr)

Research Department Agence Française de Développement 5 rue Roland Barthes 75012 Paris - France Direction de la Stratégie www.afd.fr Département de la Recherche

Disclaimer The analysis and conclusions expressed in this document are those of the authors.

They do not necessarily reflect the official position of Agence Française de Développement or its partner institutions.

Publications Director: Jean-Michel SEVERINO Editorial Director: Robert PECCOUD ISSN: 1958-539X Copyright: 4th quarter 2009

Keyboarding/layout: Marcelle LARNICOL

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 2

Table of contents Introduction

5

1.

Local taxation: definitions

7

2.

Local taxation in the European Union countries (EU-25)

9

2.2

Local tax resources in the EU-25

2.1

2.3

Local taxation system: overview

10

Summary of local taxation in Europe

14

3.

Principles and tools for an economic analysis of local taxation

3.1

9

17

3.2

Which objectives are to be assigned to local taxation?

The impact of local taxation: who bears the local tax burden?

17

4.

Local taxation questions: developing economic arguments

31

4.2

Which local taxes to apply to residents?

36

4.1

4.3

How to choose between local taxes and user fees?

Which local taxes to apply to businesses?

24 31

38

4.4

Local taxes on consumption: can VAT be decentralised?

42

4.6

What fiscal autonomy for local governments?

46

4.5

How to share the taxes between the levels of government?

43

Acronyms and abbreviations

51

References

53

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 3

Introduction

The present paper is an extension of the research work

efficiency or equity. It is thus possible to fix the terms of the

(AFD) in the field of local taxation. The study by Dafflon et

answer normative-style questions such as: What is the cost

undertaken by the Agence Française de Développement

conflicts that exist between opposing objectives and to

al. (2008), published in the series “Notes and Documents”,

in terms of efficiency or equity of imposing the principle “for

addresses various points concerning local fiscal resources,

an equal ability to pay, equal taxation” between citizens or

and this paper follows through some of the related

between local government units? Or else: What does it cost

developments.

in terms of equity and efficiency to “specialise” taxation according to the level of the local government units involved?

The purpose of this analysis is identical to the previous one:

provide an “interpretation guide” or, in other words,

questions, tools and key criteria likely to be of practical use

Although an economist’s rigorous reply to questions of local

in the developing countries (DC).

finances has never been as useful as it is today. In a

in the event of fiscal appraisals of local taxation, especially

taxation is neither simple nor final, an analytical tour of local

globalised world, where all economies are open to the rest of the planet, all public finances have become “local”.

It takes up the same frameworks of theoretical analysis,

those of local public economy and “fiscal federalism”. It also

shares the same limits, as the perspective chosen focuses

This document first gives the key definitions that clarify the

course, not the only possible approach. Other approaches

transferred or shared tax regimes. It then addresses the

exclusively on the economy of local taxation. This is, of

distinction

are equally legitimate, such as those stemming from

between

autonomous

tax

regimes

and

main characteristics of local tax regimes in European Union

political science or sociology. An economic analysis,

member countries. The third section, which focuses on

however, provides a rigorous and irreplaceable “grammar”

local taxation principles, addresses two fundamental

with respect to two points. Firstly, it makes it possible to

questions: why have local taxes? and what effects do local

identify, or even measure, the effects of an existing tax

taxes produce (who bears the burden of local taxes)? In the

system on the behaviours of economic agents (individuals

fourth and final section, economic analysis tools are used to

a current tax system or of eventual reforms to be judged

autonomous local taxation.

and companies). Secondly, it also enables the relevance of

explore the different aspects, both positive and negative, of

against predefined normative criteria, such as economic

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 5

1.

Local taxation: definitions

Sharing local resources between different sub-national

(e.g. tax base, exemptions, deductions, tax spending and

government units is necessary in view of what is at stake on

tax rate schedule). This category corresponds to a

a technical, constitutional or political level. It inevitably

specific type of taxes: those for which the tax base is one

fragile.

government that each freely sets their own tax rate

depends on conventions of categorisation that are always

and the same but it is shared by several levels of

As the question of local taxation autonomy is pivotal to all

(shared tax base). The term tax flexibility should be

the empirical approaches, particular attention must be paid

reserved for the case where a government level only sets

to the distinction between autonomous tax revenue, shared

its tax rate, or “tax coefficient” (the tax base, deductions

tax revenue and transferred tax revenue.

and tax rate schedules are identical). This category also

The degree of sovereignty held by each level of

includes systems that apply additional levies (piggyback

government is exercised on either the tax base or the tax

taxes). Finally, in the shared tax context, it may be the

rate or other components of the tax system (exceptional tax

case that a government authority does not have the

provisions such as exemptions, reductions, etc.).

power to choose and that it has to levy a tax in

Here we adopt the following definition conventions, similar

compliance with rules laid down by a higher level of

to those of Dafflon et al. (2008). These definitions are close

government. This is known as “mandatory taxation”.

to those that international bodies use in the area of taxation

Transferred

(Ebel et al., 2001). On the other hand, Dexia (2006) groups

level of government that collects the tax, but a fixed share

“own-source tax revenue”.

Exclusive

tax revenue or revenue sharing: here the

tax base and the tax rate are generally set by the higher

both exclusive taxes and shared taxes under the heading

of the revenue collected is allocated to the government

tax or own-source taxation: a tax for which

units belonging to the lower level. There are two methods

only one tier of government can exploit the tax base and

of revenue sharing. The first, based on the “origin

collect all of the fiscal revenue. A layer-cake system of

principle”, involves sharing the revenue levied by the

exclusive taxes is said to be a system of pure tax

higher government level on a pro rata basis that reflects

the actual amount collected from the lower government

specialisation (each layer has its own range of ownsource taxes). Generally, own-source taxation implies

unit in question. The second method shares the revenue

collect the tax.

factors such as the population or ones intended to reduce

according to a distribution key that takes into account

complete tax autonomy of the government units that Shared

disparities in fiscal capacity (in the last case, we refer to

tax: in this case several tiers of government have

“resource equalisation”).

access to the same tax base. If each level has full tax sovereignty, each can define its own tax base but then has

to

tackle

problems

of

co-ordination

and

harmonisation. If a government level has partial tax sovereignty, it can set only a part of the taxation criteria

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 7

1. Local taxation: definitions

Tablea 1.

Definitions of types of local taxation

Own-source taxation

Tax sharing

Full tax sovereignty of local government (tax base, rate, exemptions...)

A single category of local government collects the tax revenue and has full

Partial tax sovereignty

A single category of local government collects the tax revenue, for which

control over tax rules

it has only partial control over the

Several levels access the same

Several levels access the same tax base,

(tax base, rates, exemptions…)

tax base, with full control over the tax rules (tax base, rates, exemptions…)

No tax sovereignty

tax base and/or rates

but have only partial control over tax base and rate rules (if the tax base rules are identical for all levels of government,

this is known as a shared tax base system, as in the case of piggyback tax,

Revenue sharing

tax coefficients ...)

Tax revenue is collected by the higher

level of government that sets the tax rules.

The higher level then transfers part of this revenue according to either

i) the amount of revenue levied within the lower government unit concerned

(localisation, principle of fair return) ii) or other redistribution criteria

(e.g. equalisation, compensation...)

Source: based on Dafflon et al. (2008).

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 8

2.

2.1

Local taxation in the European Union countries (EU-25)

Local taxation system: overview

The weight of sub-national tax revenue compared to the

The share of user fees from local goods and services in

gross domestic product (GDP) varies substantially within

sub-national financial resources is on average 16% across

the EU-25. It represents on average 6.6% of GDP in 2005

all of the EU-25 in 2005. Overall, this share is growing

about 25% of total public sector revenue. In two unitary

another, ranging from 6 to 41%. Some countries that have

(4.7% for the unitary countries alone), or in other words,

slightly although highly variable from one country to

countries, Denmark and Sweden, the share is high (about

somewhat limited local tax leverage nonetheless draw

16-17% of GDP). In two other unitary countries, Spain and

substantial revenue from this source (Ireland and

Finland, the share is middling (between 9 and 11%), while

Romania). Many countries impose strong constraints on the

and Romania, it ranges between 4 and 7% of GDP. Most

use of such revenue for financing essential local public

in France, Italy (5% of GDP), Latvia, the Czech Republic

use and possibilities of setting public service fees, and the

European countries are in the 2 to 4% range (Estonia,

services such as health or education is generally limited, or

Hungry, Lithuania, Poland, Portugal, Slovakia and

even prohibited.

Slovenia), whereas Greece, Ireland, Luxembourg, Malta,

The financial resources that local governments in Europe

the Netherlands and the United Kingdom are around the

collect through revenue from their property are on average

1 to 2% mark of GDP. In federal countries, the total weight

low (2% of total local public sector revenue in 2005). They

is on average higher insofar as it compounds the resources

only play a significant role in those countries where local

of the federal States with those of their local governments.

government has a substantial housing stock (Austria, Ireland,

Thus, in Germany, it represents 11.5% of GDP (that is, 8.5

the Netherlands and Poland). In some countries additional

and 3% respectively), in Austria 7% (4 and 3%) and in

revenue is sourced through dividends from company

Belgium 5% (2.5 and 2.5%).

ownership (such as energy companies in Belgium).

Š AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 9

2. Local taxation in the European Union countries (EU-25)

Table 2.

Breakdown of sub-national government revenue in the EU-25 in 2005

Sweden

Taxes (1) (incluing share/transferred tax revenue) 69

22

52 (3)

23

France

53 (4)

Finland

47 (4)

Denmark

Other transfers (2)

Other revenue (3) 9

34

13

27

26

25

Italy

44 (10)

47 44

22

UE-25

47 (20)

37

16

Belgium

77 (50)

17

6

Luxembourg

Spain

Portugal

Netherlands Poland

34

49 (24)

42

17

56

29 (4)

37 (22)

8

9

40

31

47

16

27

Germany

57 (42)

28

15

Hungary

30 (16)

29

41

Slovakia

44 (32)

34

22

Austria

42 (33)

32

25

Czech Republic

49 (43)

39

12

Estonia

48 (44)

34

17

Latvia

47

40

13

United Kingdom Romania Bulgaria Ireland

Lithuania Malta

Source: Dexia, 2006.

27 (12)

49

88 (75)

6

40 (30)

34

9

69

35 (30)

55 80

24 6

26 26 10 20

(1) All local taxes, including shared tax revenue and transferred tax revenue, as defined in Table 1.

(2) All transfers other than transferred tax revenue.

(3) Various user fees and charges, property tax revenue.

2.2

Local tax resources in the EU-25

For local tax revenue, the national tax situations are

national government revenue within the EU-25 in 2005.

study whose definitions dovetail exactly with those we

Sweden and Belgium it is over 60%, but accounts for

highly diverse within the EU-25. There is no empirical

This weight varies substantially across countries: in

have chosen in the previous section. The only recent

less than 30% in Hungary, Ireland, the Netherlands,

study (Dexia, 2006, 2008) uses four different concepts:

Portugal and the United Kingdom.

“local taxes” (or “local tax revenue”), which also

“Own-source taxes” represent on average 57% of local

incorporate some transferred and shared tax revenue,

government tax revenue, which is 27% of total sub-

“own-source taxes” and “shared tax revenue”.

national financial resources and 15% of total mandatory

“Local taxes” represent on average 47% of total sub-

levies. “Shared” taxes (as defined by Dexia) account for

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 10

2. Local taxation in the European Union countries (EU-25)

nearly 20% of total sub-national financial resources

rates in most of the EU-12 countries. However, there is less

within the EU-25 and 43% of “tax revenue”.

leeway—or none at all—in most of the NMSs. Local

governments can often set different tax rates depending on

Some countries do not have shared tax schemes (in the

geographic zones or the kind of asset taxed, and may have

sense of Dexia’s broader definition), as in Cyprus,

a say regarding permanent or temporary exemptions. In

Greece, Ireland, Luxembourg, the Netherlands and

some countries, local governments are also responsible for

Sweden. Latvia and Malta levy no local taxes.

collecting local property taxes.

“Local tax revenues” account for a higher share of local

Local tax on economic activities is relatively widespread,

revenue in the unitary countries than in the federal

being levied in 10 member countries (cf. Table 3). Their

countries: the share of tax revenue in total revenue is

weight varies from country to country. In Germany, France,

significantly higher at the lowest level of local government

Italy and Luxembourg it is quite sizeable, representing from

(municipalities).

15 to 30% of local revenue. In most countries, it is a

municipal tax, except in France, where it spans four levels

The three pillars of “own-source” (if not “exclusive”) taxation

of government, Italy (exclusively regional), Spain (municipal

are property tax, local taxes on business activity and local

and provincial) and Germany, where part of the revenue is

personal income tax.

returned to the Länder and the Federal Government. The

Almost all of the EU member countries have local property

taxes are set according to various bases. Added value,

tax. Property tax is most often an exclusively municipal tax

when used, is often calculated at “factor cost”. The tax base

around 12% of their total financial resources and 21% of

government

(except in Belgium, Denmark and France) and generates

is generally determined according to rules set at central

their tax revenue. The proportion is especially high (over

level, but some countries give local

government a certain degree of discretion in the matter.

40%) in Belgium, Spain, Ireland, Italy, the Netherlands and

However, central government imposes a host of

relatively unimportant role in the Nordic countries, where

Often, the leeway for setting tax rates is also limited. Many

the United Kingdom. Inversely, this type of local tax plays a

restrictions, such as temporary or permanent exemptions.

local personal income tax is predominant. Local property

reforms have recently been launched, particularly in France

tax (tax levied on tenants or/and owners) is paid by

and in Germany where salaries have no longer been used

individuals and businesses. It is based either on the

for the tax base since the 1980s, and in Spain where the

useable area of residential or business premises (the

smallest businesses have been exempted since 2002-

not have an efficient land register), or on the property value

base with Value Added Tax (VAT) is under close scrutiny by

solution used in many New Member States [NMS] which do

2003. Finally, the compatibility of using a local added-value

(market value or land register value). Generally speaking,

the European Court of Justice (case of the Italian regional

this tax yields much higher receipts in countries where it is

tax on productive output [IRAP] and Hungary’s local

based on the market or administrative values. Local

business tax [HIPA]).

governments have considerable latitude for setting the tax

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 11

2. Local taxation in the European Union countries (EU-25)

Table 3.

Country

Austria

Cyprus France Germany Hungary Italy Luxembourg

Spain

Local business taxes in the EU-25, 2005 Name/level of taxation Business tax

(Kommunalsteuer)/municipalities

Tax base

Value of salaries

% of local tax revenue

% of total resources

20

10

Business tax/municipalities

Capital structure, and

18

11

Business tax (taxe professionnelles)/ municipalities, intermunicipal co-operation structures, departments and regions Local business tax (Gewerbesteuer)/

Rental value of capital assets

29

16

Company profit

43

19

Local business tax (HIPA)/ municipalities

Différence between sales of goods and services and various items related to production costs (excluding payroll) Net added value on

38

12

54

24

Operating profit

91

31

municipalities, Länder and Federal State

Regional tax on productive

output (IRAP)/region

Business tax/municipalities

Economic activity tax/municipalities

and provinces

Source: Dexia, 2006.

number of employees

(excluding amortisation)

Profits from economic activities

(services included)

9

3

Special local taxes on personal income are levied in a

alcohol, gambling, dogs, markets … The freedom to set

These bring in between 85 and 100% of local fiscal

government revenue is highly variable and is sometimes far

small number of countries (Denmark, Finland and Sweden).

rates is often supervised centrally. The share of local

revenue. The tax bases are the same as those used for

from negligible.

national income tax. Until 2002 in Denmark, the local

Systems of “shared” taxation (in Dexia’s understanding of

governments were largely given a free hand in setting rates.

the term) are widely used in 20 EU Member Sates. Only

Since this date, however, tax increases introduced by some

seven countries have not implemented this kind of system

local governments have to be offset by an equivalent

(Cyprus, Greece, Ireland, Luxembourg, Malta, the

reduction in other fiscal sectors, in order to stabilise the

Netherlands and Sweden). In new Member States, tax-

local tax rate at the level in force in 2002. Apart from these

sharing systems are replacing former grants, while in

three countries, taxation in the EU-25 can take the form of

parallel a general trend towards greater decentralisation is

additional taxes on top of the income tax levied by the

also emerging. The most productive national taxes—

central/federal Government; in this case, some margin of

income tax (IT), corporate income tax (CIT) and value-

discretion is allowed as to the rates. This is the case of

added tax (VAT)—form the hub of tax-sharing systems.

Belgium regarding the “additional cents” (piggyback tax) on

Overall, this tax-sharing generates 20% of total sub-

personal income tax (IPP), where there is a weighted

national public revenue and 43% of their tax revenue.

average rate of 16%, and in Italy, where there is piggyback

tax on the income tax (IRE) but annual rate increases are

“Shared-tax” mechanisms are widespread in the federal

subject to fixed ceilings.

countries or those on the path to federalisation; they are applied to all the most productive taxes. These schemes

In some countries, various local taxes (most often

are also found in most of the new Member States, where

municipal) complete those mentioned above. These include

they involve only income tax. Unitary countries like France,

taxes on waste disposal and treatment, motor vehicles,

the United Kingdom and some Nordic countries make less

licences and permits, transport, real estate transactions,

frequent use of tax-sharing schemes.

inheritances and donations, tourism, sales of tobacco and

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 12

2. Local taxation in the European Union countries (EU-25)

In Germany, the Finanzausgleich is enshrined in the

tax rates or bases), VAT and excise duties. In Italy as well,

major taxes (IT, CIT and VAT) to be shared among the Bund

“shared” but also involve varying local rates. For example,

the Federal State, the Länder and the municipalities on the

percentage collected at municipal and regional level, as

Constitution and authorises the revenue from the three

the system is complex, as taxes are at the same time

and Länder. In Austria, the revenue is distributed between

personal income tax gives rise to a variable rate additional

basis of a formula that is recalculated every three years.

well as to a distribution of the receipts of the national fixed-

This includes fourteen different taxes, with the land tax and

rate income tax. Specific modalities also come into play for

for local governments. In Germany and Austria alike, the

national taxes.

the tax on real estate transactions being the most important

special status regions that receive a percentage of various

distribution criteria are negotiated between the Bund and

In Denmark and Finland, shared-tax schemes are currently

the Länder, while the shared-tax rate is unilaterally fixed by

only applied to CIT. In Portugal, they involve the PIT. In

the Federal State. In Germany, the tax revenue thus

France, however, they have played a more preponderant

transferred amounts to 60 % of the Länder‘s financial

role since the wave of decentralisation in 2004. The

revenues and 30% for the municipalities; in Austria, the

domestic tax on petroleum products (TIPP) is shared

equivalent proportions stand at 30% for both the Länder

between the State, regions (at variable rates) and

and the municipalities.

departments, while the tax on turnover (TCA) and

In Belgium, the system (reformed in 1989 and 2001) is quite

apprenticeship tax (TA) are to the benefit of the

Communities and the regions with respect to personal

transfers. These shared taxes represent 18% of the tax

additional centimes for the other taxes. In total, nearly 80%

England, Scotland and Wales, corporate tax is shared,

sharing, which corresponds to 72% of their total revenue. In

resources.

complex, involving tax-sharing between the State, the

departments (at fixed rates) and should be considered as

income tax, and a scheme that mixes tax-sharing and

revenues for the departments and 10% for the regions. In

of the Community and regional tax revenues come from tax

accounting for almost half of the three nations’ fiscal

Spain, the system is relatively complex and in the process

A more detailed examination shows that the frontier

of changing. In the case of the Basque and Navarre

between shared taxation and vertical financial transfers is

communities, most taxes are levied by the community with

often shifting and highly dependent on accounting

a share of the revenue being transferred to the State. The

conventions. In this respect, the case of France is certainly

other Spanish communities receive a proportion of the

emblematic, if not unique.

personal income tax receipts (with some leeway to adjust

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 13

2. Local taxation in the European Union countries (EU-25)

Table 4.

Belgium

Local personal income tax Additional

centimes on

Beneficiaries

Municipalities

personal income Personal income tax

Finland

Municipal

Italy

Additional Municipalities and personal income regions tax (IRE) Personal

income tax

Source: Dexia, 2006.

2.3

% of total local revenue

36

rates (with possible regional

16

e.g. Wallonia).

Denmark

Sweden

% of local tax revenue

recommendations:

tax (IPP)

income tax

Tax rate

Total freedom to set the

Municipalities and counties (until 2006 (for the latter)

Municipalities

Municipalities and counties

In 2006, average rate 7.3%.

Total freedom in principle, but rate freeze since 2002.

In 2005, 20.8% for municipalities and11.9% for counties.

Total freedom

86

45

87

41

6 (municipalities) 10 (regions)

3 (municipalities) 4 (regions)

in 2005, average rate was 18.3% (between 16 and 21%)

Municipalities: rates are regulated Regions: surtax of 1.4% (rate freeze between 2002-2006) Total freedom

In 2005, average rate of 20.8%

100

69

for municipalities and 10.8% for counties

Summary of local taxation in Europe

By way of conclusion, following this cross-country

because in practical terms only a limited number of choices

particularities, certain constants appear both in terms of the

specific consumption taxes; taxes on capital, mainly land

comparison of local taxation and setting aside any country

exists: income taxes on the production factors; general or

problems encountered and the chosen solutions.

and property. Internationally, local government taxation thus covers the entire spectrum of possibilities and in this

The vertical distribution of national taxes between local and

respect barely differs from national taxation. The various

central governments is a widespread practice. The

specialisations observed in the different countries appear

distribution modalities are based on legal and sometimes

partly linked to the overall designs of national tax systems.

constitutional rules governing the allocation of resources.

For example, the major role given at central level to income

Local governments thus avoid the ups and downs of central

tax in Nordic countries is also found at local level. Yet, this

fiscal policies and, at the end of the day, enjoy the same

almost identical reproduction of fiscal structure from top to

right of ownership as the State over certain taxes. In this

bottom of the administrative pyramid is an exception rather

perspective, two types of procedures can be envisaged.

than the general rule. Most often, tax systems are

The scheme for sharing can involve tax bases, which gives

organised

local government the possibility of setting the tax rates, or,

on

the

opposite

principle

of

vertical

specialisation, although of course there are many overlaps

on the contrary, on the receipts collected, which thus takes

and differences from one country to another. Thus, in the

away their ability to influence fiscal pressure at local level.

United States, the federal government obtains most of its

In this last scenario, distribution can be assimilated to a

revenue from income tax; consumption taxes are mainly

global grant, but with one crucial difference: the strict

levied by individual States, while local government collects

application of the territoriality principle with respect to the

a land and property tax. Similar arrangements are to be

tax levied rules out de facto any notion of redistribution.

found in many other federal or unitary countries, as for

example in France, where local taxes are also to a large

The range of local taxes is evolving considerably from one

extent based on land and property tax bases.

country to another, even though similarities do exist, simply

Š AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 14

2. Local taxation in the European Union countries (EU-25)

Two lessons can be drawn from this brief international

to crystallise more specifically around two main tax

not appear to be determined by the administrative level of

other, taxation of land and real-estate assets. This would

overview. First of all, the nature of territorial taxation does

regimes: on the one hand, taxation of income and, on the

the taxes involved. This is evidenced by the broad diversi-

apparently imply a potential for new trade-offs between

ty of solutions adopted. Secondly, the choices made seem

two competing concepts of taxation.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 15

3.

Principles and Tools for an Economic Analysis of Local Taxation

There are many objectives that can be assigned to a tax

however not to leave aside other important dimensions that

two in mind: the search for productive and allocative

even if only rarely discussed by economists: the dilemma of

system (Stiglitz, 1989). Basically, economic science keeps

suggest a further dilemma that is a priori just as relevant

efficiency, and the contribution to equity, which creates the

freedom versus equality. The analysis of local taxation must

usual dilemma of efficiency versus equity. It is advisable

3.1

deal with this double divide (Gilbert et al., 1998).

Which objectives are to be assigned to local taxation?

The principle of fiscal equivalence underpins the search for

speaking, the power to create taxes. They only have the

A local tax is above all a response to a rationale that aims

law. In France, for example, national legislation determines

services. Linked to this “financial” objective is the principle

tax base, and the ceiling tax rates not to be exceeded.

right to set certain tax rates within the limits laid down by the

efficient local taxation

to cover the costs incurred in the provision of local public

the range of local taxes, the modalities for calculating the

that contributions be shared among those liable for the

Basically, the autonomy of the local public sector seems to

levies, known as the principle of “equivalence” (or the user-

depend on its capacity to adjust the level of fiscal pressure.

pays principle). As a result, the tax finances the collective

This has two consequences. On the one hand, the diversity

consumption needs that are expressed by the users, via the

of choices and situations naturally leads to tax inequalities

political mediation of their elected representatives.

among taxpayers. The localisation of the tax, which is

necessary to be able to exercise taxing powers, thus

produces territorial disparities in tax rates. On the other

This statement is not as trivial as it might seem at first sight.

hand, the political, as well as economic and social tensions

Because, as is confirmed by examining local budgets

resulting from the inequalities favour financial equalisation

anywhere in the world, the sources of local budget financing

and therefore a partial delocalisation of local resources.

are varied: loans, financial transfers from other levels of

Hence the obligation, once again, to arbitrate between two

government, income from public service charges and

contradictory aspirations and thus, generally through

property, and of course taxes.

successive adjustments, find a balance deemed acceptable

between decentralised and centralised financing.

On top of that, local governments benefit from localised

taxes. Nevertheless, the fiscal autonomy of decentralised

Local taxation and the freedom/equality dilemma

administrations, which varies considerably from one

Basically, the decision-making challenge of financial

country to another, is still more or less limited. Indeed, with

decentralisation lies in the freedom/equality dilemma. In

the exception of States that are members of a federation

reality, local taxes inevitably produce differences between

and which share extended powers with the central

taxpayers in the rates of tax that they pay. The differences

authority, local governments in general do not have, strictly

in fiscal pressure result, on the one hand, from

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 16

3. Principles and tools for an economic analysis of local taxation

management decisions taken by local authorities and, on

municipal councils, constitute two attributes,

the other hand, from the disparities between localities in

inseparable,

terms of their economic, social and geographical situations, which

are

amplified

depending

on

how

of

decentralisation.

adeptly

local

democracy

and

of

deemed

genuine

Economic analysis also shows, but with more nuance, the

administrative boundaries have been drawn up. As a result,

advantages of the localised financing of budgets. The

financial decentralisation characteristically creates taxation

argument is primarily based on an examination of the

inequalities. The freedom to tax pursued by elected officials

specific constraints concerning the choice of public goods

thus carries a price that is often deemed excessive by

and services. Legally speaking, under current laws and

taxpayers who are attached, in France especially, to the

regulations, the decision-making power belongs to the

principle of equal taxation.

elected officials. The periodic renewal of mandates

Voices are regularly heard, especially in the world of local

effectively

officials and representatives of national or federal Finance

means

that

municipal

councils

cannot

persistently ignore the potentially divergent preferences of

Ministries, criticising the solution of localised budget

voters without the risk of losing future elections. As a result,

financing and advocating the alternative option of

the democratic approval of taxation and public spending by

tax scheme without local control of tax rates (which is the

decision-making

centralised financing, for example within a shared national

a majority of citizens appears as a backdrop to the

condition sine qua non to totally root out the origin of these

power

of

the

elected

officials.

Consequently, the ballot box is the primary source of public

disparities). Certainly, elected officials would lose the

choices either directly (budget referendums in a system of

but they would retain the right to allocate the available

representatives in a system of representative democracy).

authority to arbitrate between public spending and taxation,

direct

resources freely depending on needs. In fact, the elasticity

democracy),

or

indirectly

(designation

of

However, does voting enable the citizens’ will to be

of the collected receipts would offset the inconvenience

expressed correctly? In other terms, do the public services

caused by the loss of fiscal autonomy, provided that there

offered by elected officials correspond to what voters want?

was sufficiently flexible indexing of the tax rate structure.

As a key result of the economic analysis of collective

For some specialists however, the decision-making and

decisions, the ability of the democratic process to deliver

financial aspects of decentralisation constitute a coherent

efficient budget choices, that is to say choices that meet the

would profoundly distort the local public institution in the

provided to those voting about the costs of the proposed

bundle. In their view, the suppression of fiscal autonomy

expectations of the citizens, depends on the information

name of a narrow vision of tax equality, by failing to take into

services. Certainly, the simplest and most precise way to

account the diversity of services provided. Without the

make the voters aware of public expenditure is to link the

possibility to adjust budget levels, elected officials would

requested services to the payment of a financial

not be able to respond to the changing expectations of

contribution. This linkage between services provided and

citizens, which are in fact liable to evolve substantially in

price paid would seem necessary for effective democratic

spatial terms according to their housing conditions or

expression of collective choices. The ballot box is not,

income. Were local governments to depend on national

moreover, the only vector for the informative role assigned

would then become no more than relays of the central

known as “voting with one’s feet”, provides another possible

resources and on state-defined distribution criteria, they

to local taxation. The mobility of residents and companies,

authority, which would be the sole distributor of resources

mechanism for choosing local public services. This

and, consequently, the ultimate judge of needs. For this

however is reserved exclusively to tax-paying users wishing

reason, in many countries and notably in France, the right

to take up residence in a new commune (the right to vote is

can approve them thanks to the regular renewal of

therefore mobile in terms of residence). By taking up

of elected officials to levy taxes and the fact that taxpayers

given to citizens who are domiciled taxpayers, and not

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 17

3. Principles and tools for an economic analysis of local taxation

residence, new arrivals choose, either implicitly or explicitly,

factors (labour, capital, land) used with the most efficient

position to arbitrate between, on the one hand, the public

achieve better results, both quantitatively and qualitatively,

a local collective environment and are thus potentially in a

technology. In other words, technical efficiency aims to

services provided, and on the other hand, the tax

without spending more. For a variable output, thus still to be

requested.

determined, sectoral allocative efficiency defines the optimal quantities of goods and services to be produced

The particularities of local taxation stem from the

taking into account, on the one hand, the consumer

geographical mobility of residents and businesses, in

preferences and needs and, on the other hand, the primary

contrast to taxes raised by central tiers of government,

resources available. The distribution of the means of

which for a long time have been relatively unconcerned by

production between competing activities produces and at

possible spatial movements of tax bases. Today, however,

the same time destroys social well-being. For example,

the expected increase in the circulation of persons and

while the development of local public services responds

capital within the single market framework is gradually

well to the collective needs of inhabitants and companies, it

transforming national tax regimes into local tax regimes on

is also accompanied by reduced individual private

a European scale. The mobility of users in fact brings an

consumption at the level of the tax levied. Consequently, in

additional dimension to local taxation decision-making now

order to share productive factors efficiently, respective

subject to two influences: one internal to the collection (the

outputs must be developed to a level where the social

ballot box), the other external (“voting with one’s feet”). On

benefit that is created in return remains higher than the

account of this geographical mobility, localities find

social benefit that has been destroyed. As for marginal

themselves de facto in a situation of competition. Hence,

utility, the utility of the last euro spent should be identical for

the financial autonomy of elected officials ultimately

all alternative uses.

appears to have permanent limitations, as it depends not only on legal constraints to the use of taxes or on taxpayers’

To the condition of an optimal sectoral allocation of

economic development.

another condition must be added: the optimal distribution of

electoral reactions, but also on the requirements of local

resources between alternative forms of consumption, economic

Local taxation and the equity/efficiency dilemma

and

residential

locations

between

local

governments. In reality, the specificity of local public

As an instrument for collecting resources and an indicator

economy lies in the spatial dimension of the supply and

of the cost of services, local taxation also constitutes a

demand of public services. Consequently, the users of

mechanism for redistributing income and thus for reducing

services must have already made the choice to settle long-

social inequalities. Yet, as a general rule, a single taxation

term (for example, a main residence) or on a temporary

system cannot simultaneously carry out these three

basis (for example, as a tourist) in order to benefit from

missions in satisfactory conditions. This means that, after

them. Thus, an efficient system of local taxation must also

the arbitration between centralised and decentralised

foster an optimal geographical distribution of households

financing, the choice of the priority objectives to be

and businesses. Optimal territorial development, to employ

assigned to taxes comes up against a new dilemma:

the term used in France, means that no change in location

whether to seek economic efficiency or fiscal fairness.

can increase the level of social well-being. When the territorial optimum has been achieved, mobility no longer

In economic science the concept of efficiency has two

makes it possible to improve the situation of some

complementary meanings. For a given output of goods or

individuals without deteriorating the situation of others.

services, technical efficiency assumes that the accounting

Thus, the incentives to change residence disappear and, as

cost has been compressed to the lowest economic cost,

a result, so do the migration flows between localities.

which corresponds, by definition, to the minimal production

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 18

3. Principles and tools for an economic analysis of local taxation

The rule of the equalisation of marginal utilities seemingly

role is supplemented by the elected officials’ political

practical effect. In reality, as utilities belong to the subjective

in the absence of a direct expression of the latter’s

provides a sectoral efficiency criterion devoid of any

responsibility for assessing the needs of their fellow citizens

realm of individual preferences, no external observer would

preferences. Next, the search for sectoral and spatial

be able to step into the shoes of voters and elected officials

efficiency also falls within the legislator’s sphere of

in order to assess the social value of local public activities.

competence, insofar as the result depends on the

However, voting does not necessarily result in an efficient

institutions that have been set up. Any progress in this

social choice in all circumstances. Democratic legitimacy

direction requires appropriate reforms in the local budget

does not automatically guarantee that marginal utilities will

and taxation structures.

be equalised. The result depends on how the process of

Yet, local taxation is not simply a decentralised tool for

choice is organised both institutionally and financially.

economic efficiency. It is also an instrument for

Ideally, decisions should be taken in the framework of

redistributing income and/or inherited wealth, and thus a

budget referendums, thus giving citizens the opportunity to

tool for social justice. The apportionment of local taxes

express their preference on each project (which is the

raises the twofold problem of equity: the first is also

solution applied in some Swiss cantons). From this point of

common to State taxes, the second is specific to local

view, representative democracy undoubtedly offers a

taxation. In each locality, the sharing of the tax burden

convenient, but imperfect, alternative to direct democracy.

between users who have unequal contributive capacities

However, the result also depends on the local financial

requires that the adopted tax bases and tax rate schedules

system. Sectoral efficiency in effect assumes that the

be tailored to the chosen objective (termed vertical equity

totality of the additional spending incurred by developing

criteria). Across localities, the taxation of users who have

local public services is borne by local payers, either users

equal ability to pay, but who reside in different communes

or taxpayers.

and therefore benefit from different public services, poses

The rule of spatial efficiency also appears to have no real

the problem of what is referred to as horizontal or territorial

substance since, given that individual utilities cannot be

equity.

measured, there is no way in which the condition of

The objective of efficiency aims to maximise the productive

invariance of well-being can be verified. Again, although the

performance of the economy for a given distribution of

criterion of optimality is not directly measurable, economic

income and inherited wealth. On the other hand, the

analysis provides the necessary and adequate conditions

objective of equity is uniquely concerned with the

for achieving the objective. Likewise, the result depends on

redistribution of the resources produced. In appearance

the ways in which local public goods and services are

therefore, the complementary nature of the spheres of

financed. Local tax offices need to provide mobile

intervention eliminates any risk of conflict between policies.

taxpayers, meaning those who wish to take up residence in

Local governments should thus be able to harmoniously

a new place, with detailed information about the social

link together economic performance and social justice. In

costs resulting from their choice of location, particularly the

actual fact, equity and efficiency are two competing

amount of the additional spending borne by the host

objectives in terms of both results and means. This means

commune, as well as any eventual environmental costs.

that mutual sacrifices have to be made with respect to the

This has two consequences. First of all, the management

targeted aims. In other words, any tax system that is

role of local decision-makers is basically limited to the

efficient will be costly in terms of equity and, inversely, any

production

thus a need to arbitrate between specialised tax systems

domain of technical efficiency, with the aim of reducing the costs

by

implementing

modern

fair taxation will be costly in terms of efficiency. There is

public

management methods. In representative democracy, this

that are adapted to one of the objectives and not the other.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 19

3. Principles and tools for an economic analysis of local taxation

In the area of public finance, the efficiency/equity dilemma

a complementary tax must be established in order to share

the sharing of taxation between individuals: the first makes

accordance with the rules of economic efficiency; even if, in

crystallises the opposition of two important conceptions of

the costs of the services provided on a pro rata basis, in

a pro rata calculation of the “benefits” or of the costs; the

practice, doing so proves a tricky issue since it is difficult to

second calculates on the basis of the ability to pay and thus

calculate precisely how individual and collective benefits

in terms of income and/or inherited wealth. Economic

are shared.

efficiency involves linking payments to the benefits obtained

The necessary coexistence of charging for use and taxing

from public services or to the costs incurred by the users.

in no way implies any questioning of the pivotal principle of

From this point of view, instituting a tariff (or, more precisely,

financing the benefits or costs on a pro rata basis. In

a subscription) constitutes the most effective form of

achieving sectoral and spatial efficiency, the difference

financing. This form follows the logic of voluntary exchange

between price and tax does not depend on the targeted

and, as such, conveys the most precise information about

objective but on the method used to recover expenditure—

the comparative social utility of public and private services

directly in the first case, indirectly in the second. Hence,

by giving users the opportunity to express their preferences

logically, local taxation must also be designed in the same

and needs, with no intermediary, and thus without any bias.

way. In other words, the arbitration between price and tax

The commercial logic of tariffs is also a powerful factor for

does not here involve a dual conception of local public

driving technical efficiency, since it pushes managers to

financing, but simply specialising the tool used to achieve a

reduce costs in order to avoid a situation where services

single objective: to share on a pro rata basis the collective

lose users because their prices are too high.

costs of the services provided.

However, the generalised charging for the use of local

On the other hand, sharing the tax burden according to the

services, independently of all arbitration between efficiency

ability to pay, out of a concern for social justice, requires a

and equity, is not to be envisaged (cf. Section 3.1.). A first

logic that is seemingly irreconcilable with the previous one.

obstacle stems from the technical indivisibility of certain

In fact, nothing guarantees a priori that the benefits of

public services and/or from the excessively high

public services will be distributed proportionally to income

administrative cost of individualising the services (for

and/or to inherited wealth, and thus there is no guarantee

example, protection against fire or the use of urban road

that a single rule can be drawn up for the apportionment of

systems). Resorting to taxation then becomes necessary in

local public costs, likely to satisfy at the same time the

order to cover expenditure. A second obstacle comes from

objectives of equity and efficiency.

the complexity of sharing the benefits of public services, not

only among users, but also among non-users. For example,

As a result, every proposal for tax reform is based, implicitly

public transport in urban areas is directly useful to its users,

or explicitly, on the willingness to give preference to one of

as a means of moving around, but also indirectly to

the conceptions at the expense of the other. In these

motorists, by reducing the number of individual vehicles in

conditions, is it still possible to speak of a single local

circulation, and consequently traffic congestion and

taxation? Or is it urgently necessary to develop two parallel

pollution. Yet, the users of public transport will not easily

visions of local taxation, one centred on distributive justice,

agree to pay for the service provided beyond the personal

the other on economic efficiency? And in the large range of

benefit gained from the journey, and to voluntarily finance

possible choices, is there not a compromise solution that

the so-called external savings, created for the benefit of

could help to reduce the conflict of objectives as far as

non-users; on top of that, the potential users of public

possible?

services will hardly agree to contribute to the financing of services that they are currently not using. This means that

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 20

3. Principles and tools for an economic analysis of local taxation

From theory to practice: the equity/efficiency dilemma and

b) when the tax bases are potentially mobile (for

The traditional theory of financial federalism does not

whose resources come mainly from income from

between levels of government. It indicates macro-

rather than from a salary);

example, in the case of income tax, or individuals

tax “specialisation” at each level of government

directly provide any distribution keys for sharing taxes

inheritance, investments and wealth management,

objectives or “functions” to be pursued at each level

c) when one seeks to tax taxable income generated in

(Musgrave, 1983 and 2000; Boadway et al. 2000; Dafflon et

several different local government units;

al., 2008), from which it is then possible to draw some fiscal

consequences by relating tax parameters (mainly tax bases

d) a contrario, local redistribution policies have a

and rates) to the macro-objectives pursued. Moreover, at

certain degree of efficiency if, on the one hand, the

this level of abstraction, the effect of these theoretical

“distance” (in the geographical sense of the term)

prescriptions remains very general and it is illusory to think

between

that there exists an ideal distribution of tax revenues that is

and

donee

influences

the

satisfaction of the donor, and on the other hand, if

valid for all time and across all countries.

the information on incomes is all the more precise

when the distance is short (Pauly, 1973; Derycke et

The main conclusions derived from the traditional theory of

al., 1988).

financial federalism can be divided into five points:

3) The lower levels of government should tax low-

1) The taxes that contribute to macroeconomic

mobility tax bases in order to avoid fiscal

stability must be levied by the central government.

competition (or “the race to the bottom”), or more

The tax revenue of the local levels of government

generally budget competition. Let us remember that

(particularly communes) needs to be stable. Certainly, if

taxes

their borrowing capacity is reduced or restricted to

have

a

counterpart—the

public

services

provided—and that taxpayers, in the “voting with the

financing investments, local governments will find it

feet” logic of Tiebout (1956), take both of these aspects

hard to raise short-term loans to help them smooth cash

into account when choosing their place of residence. In

flow. Another politically trickier way of doing this would

be to create

donor

reality, this question remains entirely open because,

a rainy-day fund during a buoyant

schematically, there are two opposed positions about it.

economic period, which could be used in recessionary

For some (for example, see Wilson, 1999, for a review

times of when tax revenues drop. With the second

of the related literature), tax competition leads to (i)

solution, the automatic stabilising effect obtained locally

one-upmanship in local tax rate reductions; (ii) a sub-

would not be in contradiction with the central

optimal supply of local public goods; and (iii) a transfer

government’s macroeconomic actions.

of the tax burden to the less mobile economic actors.

2) Progressive taxes aimed at interpersonal redistribu-

For others, individuals’ mobility is a mechanism for

tion must remain the responsibility of central

revealing Tiebout-model preferences, which have

government:

efficiency properties governed by a set of relatively strict assumptions. For the proponents of the Leviathan

a) because local redistribution policies are insufficiently

model, tax competition is a way of curbing the predatory

discriminating; they correct individual situations in

tax behaviour of elected officials, assumed to be

an incoherent manner (for example, the situation of

opportunists (see Brennan et al., 1977 and 1980, who

a poor taxpayer in a “rich” locality and that of a

are the founders and mainstay of this school of

similarly poor person in a poor locality);

thought).

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 21

3. Principles and tools for an economic analysis of local taxation

4) As underlined by Dafflon et al. (2008), tax bases that

activities must be the exclusive responsibility of the

are very unevenly distributed throughout the

national authorities? The situation here is different

country should be “centralised”. To simplify matters,

because there is a real tension between the concern

tax bases can be seen as having two origins: either a

about territorial equity and the need to maintain local

geographic

economic

negotiated solutions (such as equalisation or inter-

e) In the first case, centralisation can be justified for

5) User fees and other taxes levied according to the

budget cost of equalisation policies. However, this

pays principle) must be used appropriately at all

local supply of natural resources (mining, oil, etc.), or a

development:

location

conducive

to

development

incentives.

More

flexible

and

community co-operation) are necessary in this case.

benefits-received principle (or in practice, the user-

reasons of territorial equity, and therefore of the

levels of government. This choice becomes a priority

choice could create a feeling of expropriation in the

regions that have these resources (distorting the

if there are large inter-community disparities in the

principle of a fair fiscal return). But the central

preferences for local public goods. This choice has a

government could also object to this rent either

redistributive impact since the fees make it possible to

being captured by a local elite, or serving the

have the users (and not the taxpayers) pay all or part of

interests of those opposed to the central authority.

the cost of the service they receive. But this

redistributive impact can be taken over by the central

f) In the second case, let us imagine that economic

government if the redistribution function is centralised.

activity is very unevenly spread across the national

Although it raises the issue of the ability to pay and the

territory. This may be due to its more or less

underlying redistributive policy, this kind of levy is rarely

favourable geographical location within the territory,

envisaged, and unfortunately too infrequently used, in

but also to local actors’ interest in economic

the developing and transition countries.

development. Must one then follow the same centralising logic and conclude that taxing economic

Box 1. The Basic Principles of Tax Sharing in the Framework of “Financial Federalism” Since

taxes (and user fees) are designed primarily to promote economic efficiency, they must be shared between the levels of govern-

ment in function of the size of their tax base, in inverse ratio to their degree of mobility and the geographic scope of the externalities they

create, and in proportion to the extent of disparities in the preferences for local public goods (if taxation is levied according to the principle of user-pays).

Taxes Taxes Any

that primarily target redistribution (between individuals) must be reserved above all to central government level.

that are adjusted mainly in view of macroeconomic stabilisation considerations must be allocated to central government level.

eventual contradictory effects (for example, the redistributive impact of decentralised taxes levied to promote economic efficiency, or

the distributive effects of stabilisation policies) must be dealt with at central government level.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 22

3. Principles and tools for an economic analysis of local taxation

3.2

The impact of local taxation: who bears the local tax burden?

The question of the impact of local taxation is fundamental

which would enable owners to avoid paying part of the tax.

for fiscal appraisals carried out from an economic point of

Tenants who do not pay property tax can in this case bear

view. It is also particularly complex since local taxation has

the burden; in its entirety if the price elasticity of the

the taxpayer targeted by the tax who will ultimately bear the

other than zero. On the whole, the property tax paid by

a double dimension. There is an economic dimension: is it

demand is zero (sticky asset), only in part if the elasticity is

burden? Or how will the tax burden be transferred from one

owners is borne by the latter on a pro rata basis for the

agent onto another? And a spatial dimension: where are the

share of the tax base that is strictly property, and for the

initial and final taxpayers located, and how therefore is the

remaining share by the tenant if the asset is rented. This

tax burden transferred from one place to another?

kind of reasoning leads to significant redistributive

considerations; property tax would appear progressive

To answer these questions, economic theory hinges on two

compared to income if one considers that it is borne by the

pivotal concepts; that of tax exporting, and that of tax exter-

owner, regressive if one considers that in the end it is paid

nalities.

by the tenant. This latter view is the one that emerges from empirical studies of property tax especially those carried

The first concept will be dealt with briefly using the example

out in the United States.

of local real estate taxes; the presentation of the second

concept, already analysed by Dafflon et al. (2008), will take

Second view: Local property tax as a tax on capital

up their theses again with no major changes.

In this second view, local property tax is not seen

primarily as a tax on land capital or property capital, it is

The impact of local taxation on real estate

a tax on capital per se (certainly of a specific type, and

It is commonly believed that property taxes are the local tax

certainly levied in different ways from one commune to

par excellence, since their base is directly linked to a local

another depending on the local tax rates, but nonetheless

territory. But one difficulty involved is actually knowing who

on capital). It is thus a tax that increases the cost of

exactly is being taxed through this tax. Over time,

capital in comparison with other factors of production

economics has developed three views of property taxes

(labour, for example), since it leads those who possess

(Gilbert et al., 1988; Wildasin, 1986; Stiglitz, 1989; Gilbert et

capital to seek a higher pre-tax return so as to offset the

al., 2002).

payment of taxes. In this case, the tax produces two effects in addition to the strictly geographical effect of

First view: Property tax as a specific tax on capital invested

delocalising the tax bases: a factor substitution effect and

in the real estate sector

a sector substitution effect. The former leads to the

From this point of view, property tax is always borne

substitution of the factor that is not taxed (here the

entirely by the property owner, since the offer of land is

labour) for the factor that is taxed (the capital); the latter

considered as a given for all time. The capitalised values

leads to the substitution of goods whose production

of taxed property assets show a negative tax capitalisation.

requires the less heavily taxed factor for goods whose

Symmetrically, a tax on the user of property is borne by the

production requires the more heavily taxed factor. On the

user.

whole, capital (assumed to be mobile from one commune

This kind of logic cannot be transposed directly onto the

to another and from one asset to another) will be invested

majority of local taxes (such as property taxes on built

in communes that have lower tax rates and in a variety of

property paid by the owners or taxes on residents, whether

assets, until the rates of return on assets become equal

they are owners or tenants). In fact, if capital markets are

across all communes and all assets. The effects of local

perfect, it is the capital invested in housing that is targeted

property tax thus become more global (known as “general

by the tax; the capital could then be transferred from the

equilibrium” effects).

sector that is taxed towards sectors that are taxed less,

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 23

3. Principles and tools for an economic analysis of local taxation

An analysis in terms of fiscal impact then loses all its

Third view: Local property tax, as a user fee for local public

interest since the local tax is assimilated to a price. As a

services

result, the tax will generate no distortion if the number of

If taxation on property represents the main source of

communes is large enough to enable each taxpayer-user,

financing for local budgets and if these budgets include only

through mobility, to find a commune offering the best ratio

the costs of providing local services as expenditure, then

between the services desired and the fiscal cost. The

the property tax can perhaps be likened to the price asked

capitalisation of local taxes into property values is

in order to benefit from these services.

accompanied by a (positive) capitalisation of the services

provided.

Box 2. A Closer Look at the Theory: Does Tax Capitalisation Exist?

The close interrelationship between the benefits derived from local public goods and the formation of land rents, and thus the inevitable role

of the spatial dimension, have been present in the literature on local public economy from the outset, especially in Tiebout’s (1956) founding

model. Space however is quickly “cancelled out”, either by the assumption that the actors are immobile (as in the models of fiscal behaviour),

or by an ad hoc representation of the locations (as in the tax competition models).

The only thinking on local public economy focusing on the spatial dimension has a logical interest in the role of localised public goods and local taxes in setting of land and property prices. The notion of land is thus introduced into the analysis but not the formal notion of distance,

as is indicated by Scotchmer et al. (1993). However, analysis of the process of tax capitalisation, based on the estimation of hedonic functions, generally validates the assumption that local budgetary decisions have an important impact on land rents.

The hypothesis of capitalisation of local public goods into property and land prices

The hypothesis of tax capitalisation constitutes an essential pillar of spatial public economy, alongside the “Henry George theorem” and the “Samuelson rule”.

The mechanism of tax capitalisation rests on the assumption that the offer made by a potential buyer of a piece of land or a property positively

integrates the value that he/she attributes to the local public goods associated with its location, and negatively integrates the property tax requested in return (while also considering numerous other characteristics of the property or piece of land, particularly its spatial situation

and physical characteristics). The final market price depends on the offers of other potential buyers. Thus, if all the interested buyers have

identical preferences, their evaluations converge and the land and property prices then wholly capitalise the net benefits of public services.

On the other hand, if a diversity of preferences is assumed, the capitalisation is not total.

The hypothesis of capitalisation is not identical to the Henry George theorem, in spite of the common link they both establish between land rent and local public goods. Kuroda (1994) has provided the demonstration of this using a simple model. The theorem of Henry George

characterises the optimal population level of a community. The population of a community is considered optimal when public expenditure is

entirely covered by land rent, after deducting the income attributed to the owners of the land. The condition of demographic optimality

therefore does not depend on the residents’ preferences; it depends on the technical domain and not that of utility. However, this highly

precise finding is basically no more than a point of “curiosity”, as it is in fact based on assumptions that are restrictive and hardly realistic,

such as the completely indivisible nature of local public goods.

The Samuelson rule defines the optimal level of public goods as being when the sum of marginal rates that the users pay are equal to the

marginal production cost. In this case the condition of optimality depends on the consumers’ preferences.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 24

3. Principles and tools for an economic analysis of local taxation Finally, the condition of capitalisation assumes that the monetary profits from public investments are incorporated into property values.

Differing from the Henry George theorem, the capitalisation assumption not only integrates the buyers’ preferences, but also does not involve

the overall level of local public goods provided by the locality, only their marginal variation.

Yet, the likelihood that the profits from local public investments are wholly capitalised into property prices seems slight, even using the most

favourable assumption that preferences are homogeneous. In fact, if the local population is optimal, total capitalisation requires that there be no non-resident owners, except in a world of “small open communities” interested in utility. If there are heterogeneous preferences,

capitalisation cannot be total. In addition, if land and property markets are not in competition, the sources of distortion are increased and the variations in price are no longer representative of the variations in well-being.

As a result, trends in land and property values do not generally provide an unbiased evaluation of the social benefits of local public

investments. For that reason, the capitalisation mechanism does not furnish an incontrovertible criterion for evaluating investment or, by

extension, public policies; and this is not to mention the further difficulty of attributing to a specific activity a share of the variation in land rents resulting from a multiplicity of factors.

Empirical tests of the hypothesis of fiscal capitalisation

Nevertheless, the capitalisation hypothesis is of considerable interest for analysing local government activities. However, there exist relatively

few econometric estimates based on the adjustment of hedonic functions largely due to the high cost of collecting data on land and property

transactions. The results of tests carried out on France, for example, show that one cannot reject the hypothesis that at least part of the profits from local public goods and from land and housing taxes are capitalised into property values.

The first attempt at econometric verification of the hypothesis of tax capitalisation was carried out on 900 transactions of privately-owned

houses (secondary market) completed in 1980 and 1983 in 70 communes in the suburbs and outer suburbs of Rennes (Guengant, 1992).

The statistical adjustment of the envelope of the set of curves relating to the property sales covers around two-thirds of the observed

variations in price. The relatively high quality of the estimate, especially for individual data, suggests that property sales are not exempt from

certain general determining factors, like the distance from the centre of the built-up area, the local services proposed and the local tax rates.

Thus, at that time (1983), a lengthening of the time needed to reach the city centre reduced secondary market house prices by 4,000 francs

per additional minute, ceteris paribus. The statistical adjustment means that the hypothesis of tax capitalisation is not to be rejected. For the sample studied, a progression of 10% in the level of local public services per inhabitant increased the sales value of the houses benefiting from the services by around 2%. Inversely, a 10% increase in the property tax burden reduced purchase prices by 4%, ceteris paribus.

Since then, other evaluations of hedonic prices of housing have confirmed the partial capitalisation of local public goods into property values (Gravel et al., 1997).

A horizontal externality is produced when the tax decision

Horizontal and vertical externalities

of locality A has an effect on the financial situation of

The tax revenues of decentralised public authorities

locality B situated at the same level of government. This

comprise not only own-source taxes but also, very often,

effect can be direct (tax exporting) or indirect (by

shared taxes, which create vertical externalities. The

delocalisation, for example). A vertical tax externality

existence of externalities is liable to have an impact in many

occurs when the tax decision of one level of government

spheres, including economic efficiency, equity and local tax

has an influence on the budgetary constraints of another

autonomy.

level of government (Vigneault et al., 1996).

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 25

3. Principles and tools for an economic analysis of local taxation

3) when several different levels of government tax the

This is the case:

same tax base (an idea that one rediscovers in the

1) when the taxes levied by one level of government give

terms “concurrent taxation” or “tax base sharing” used in

the right to a credit or to a tax deduction for another level of government;1

the North American literature).

2) when two or more levels of government grant tax exemptions;

Table 5.

Typology of territorial tax externalities

Horizontal tax externalities

Source: Dexia, 2006.

Effects

Direct

Tax exporting (taxes on

The community makes “excessive”

Indirect

Tax competition by delocalisation

Tax rates that are “too” low

Direct Vertical tax externalities

Examples

Indirect

tourism activities)

(local tax on a mobile tax base)

Concurrent taxation/tax base sharing

Exemptions imposed by another

use of exportable taxes

One or serveral levels tax

level of government

“excessively”

Externality of resources (local economic

Insufficient supply of local services

development policy that increases central tax revenues via national taxes)

While the first two points are dealt with in an already dated

that generate a flow of external resources

taxes that goes to the federal level (Tanzi, 1995).

literature (see Gilbert, 1996, for example), it is only more

It is finally the (little known) articles of Flowers (1988) and

recently that the theory of tax federalism has focused on the

Johnson (1988) that have put the issue of overlapping taxes

issue of the vertical externalities resulting from a situation

back on the agenda. The works of Keen (1995, 1998),

where several levels of government exercise the power to

Wrede (1996), Flochel et al. (2002) and Keen et al. (2002)

tax the same tax base. This can appear paradoxical since

characterise this new approach. It seems finally that joint

overlapping taxation (in other words, the piling up of tax

taxation of the same tax base by several levels of govern-

rates on the same tax base) concerns the majority of coun-

ment leads to an over-exploitation of the shared tax base (in

tries (cf. Section 2. for the case of the EU-25), whether they

other words, to an excessive overall tax rate).

are centralised or decentralised. Musgrave (1983) dis-

cusses this question from a basically administrative point of

view: he examines the desirability of entrusting the collec-

tion of taxes from levies on the same tax base to a single

tax collection agency. He shows that the choice is then the

result of a trade-off between the economies of scale made

possible by this kind of solution, and the ensuing risk of

moral hazard were the agency in question to favour one

level of government to the detriment of another—a situation

1 As an example, in France, the local business tax (TP, “taxe professionnelle”) is deductable from the tax base of the corporate tax (a national tax). A part of the tax burden paid by the local taxpayer is therefore, in fact, transferred to the national taxpayer. A contrario, TP-related exemptions or tax relief that are determined by the central government and partly offset by the central State are therefore partly borne by the local governments.

which is far from being a theoretical hypothesis in a country

like Russia, where local civil servants collect the part of

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 26

3. Principles and tools for an economic analysis of local taxation

Box 3. Overlapping Taxation and the Tragedy of the Commons: Lessons from Theoretical Models Take

two different levels of government with overlapping geographical territories. Let us assume that their objective is to maximise their

tax revenues net of taxation costs. To do this, they have the same tax base, the volume of which one assumes reacts negatively to any tax rate increases, and each level of government considers the tax rate of the other as given. In this case, the overall tax rate borne by

the tax base is higher at equilibrium than the tax rate that a single level of government would levy when taxing the same tax base (Flowers,

1988). As a result, the total tax revenues collected by the two levels of government are lower than those they could have obtained had

they consulted one another and fixed the rate at the top of the curve linking tax returns to tax rates (known as the Laffer curve). In other

words, Nash’s “vertical tax equilibrium” is not efficient. The fact that governments are benevolent (that is to say, they maximise the

usefulness of households residing in their jurisdictions rather than tax income) does not qualitatively change the outcome because the vertical fiscal externalities at work are the same: if neither of the two levels of government takes into account the losses in tax revenue

that an increase in its tax rate would cause for the other, then both underestimate the marginal social cost of the tax rate compared with the situation where the tax base is taxed by only one level of government (Keen, 1995).

The observed inefficiency is further aggravated if the two levels of communities are in an asymmetric situation. This is the case, for example, where the shared tax base is taxed at the same time by a central (or federal) government, which is the first to fix its tax rate, and

by local governments that operate in second place. In this case, the total tax rate supported by the tax base (always considered flexible

compared to the tax rate) at equilibrium is higher than the rate supported when the two levels of government play in Nash and, as a result,

the tax base is lower, as is the total tax revenue. Besides, the tax rate set by the central government when it is a Stackelberg leader is

higher than the rate it would have chosen at Cournot-Nash equilibrium and its tax revenues are also higher. This is obviously to the detriment of the second actor, here the local level whose situation deteriorates compared to the Cournot-Nash equilibrium. Redistributing tax revenues from the local level to the federal or national level goes together with an increase in tax-related distortions (Flowers, 1988).

If

the two levels of government seek a more realistic solution, they should take into account both the horizontally interdependent

relationship between public authorities (relationship between governments of the same level) and the vertical relationship reviewed in the

previous paragraph. In this case, it is necessary to combine the respective effects of the horizontal with vertical tax externalities on the

marginal cost of public funds. The first are a familiar feature of the literature on horizontal tax competition. It has been shown that they are all the larger, and therefore more subject to distortion, when the number of competing local governments is high (Wildasin, 1988). Likewise,

they increase the marginal cost of public funds and consequently push towards a reduction in local tax rates. The second push, rather, towards a rise in the overall tax rate on the tax base, because overlapping taxes result in an increase in tax rate of one level of government

and a reduction in the tax revenues of another level. Analysing the combined effects of horizontal and vertical externalities shows that first

of all it is necessary to add a higher level of government that taxes the same tax base as the local level (the higher level can also offer the

same public good to all the population financed by taxing capital); in addition, it requires that the overall supply of capital (which until now

was fixed) be variable since without that, the fiscal policy of the central or federal government will not be constrained and the taxes that it raises will be equivalent to a flat-rate tax in terms of fiscal impact (Boadway et al., 1998; Madiès, 2002). The studies undertaken in this field (Keen et al., 2002; Flochel et al., 2002) have shown that an increase in tax competition at the decentralised level strictly increases

the overall tax revenues levied in each local government. This analysis challenges the results obtained by Brennan et al. (1977, 1980)

when only the horizontal competition between sub-national authorities was taken into account. The explanation is simple: increasing the

horizontal tax competition reinforces the monopoly power of the central government. In the extreme, one could imagine a situation in which

the number of competing government units is so high (and therefore the horizontal competition so sharp) that there would no longer be

any taxation at the local level and the central government would behave as an unconstrained Leviathan. If governments are benevolent,

then intensifying tax competition at the decentralised level increases households’ well-being, at least if the public goods offered by the

central level and the local level are perfect substitutes for each other; it is true that this is a restrictive hypothesis. Adding a higher level of government above communes runs counter to a classic result, studied notably by Hoyt (1991). He considers that increasing the number

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 27

3. Principles and tools for an economic analysis of local taxation of competing local government units reduces the well-being of individuals since this exacerbates horizontal fiscal externalities related to

the mobility of the tax base, whereas tax consolidation (the merging of communes) increases well-being because it makes it possible to internalise some of these fiscal externalities.

Source : Dafflon et al., 2008.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 28

4.

Local taxation questions: developing economic arguments

As a general rule, any examination of local taxation

Which

systems raises a series of questions for which it is

to share taxes between the levels of government?

Can

one, should one, protect the fiscal autonomy of local

(4.4.)

necessary (and often possible) to develop arguments

based on economic analysis. These questions are:

local taxes to apply to businesses? (4.3.)

How

How

to choose between local taxes and user fees? (4.1.)

4.1

How to choose between local taxes and user fees?

Which

governments? (4.5.)

local taxes to apply to residents? (4.2.)

The principle of user fees as a means of financing the local

must be bought in excess of a given number … The

public sector is an extension of the “principle of

techniques used to provide the service and the ways of

contribute to the cost of providing local public services

behaviour. It is therefore advisable to define them very

equivalence”, according to which each user is required to

charging for it often have very different effects on the users’

because of the use that he/she makes of them. It is applied

precisely.

competence by competence and does not extend to the

Why fees?

whole budget. This principle aims to restore market-type

The use of user fees meets a twofold objective that strictly

mechanisms to public sector management by introducing a

target economic efficiency, or in other words zero-waste: to

direct relationship between all the beneficiaries and the

avoid an excessive demand for public services and to avoid

contributors.

“stealing the silver” types of behaviour.

The use of user fees is widespread (cf. Section 1. on the

It first of all seeks to avoid an excessive demand for public

definitions of local taxation). Accordingly, it is frequent in the

services. If these are freely accessible and are not subject

sectors of water supply, sewage disposal, waste collection

to a user fees, the groups using them are in fact making

and treatment, cemeteries, territorial development, parking

non-users bear a part of the costs. The demand then

and public transport.

becomes excessive because it is not checked by the inte-

Beyond their common founding principle, the payments that

gration of costs, as would be the case for market goods and

users are required to make can form part of different legal

services (everybody knows that the “needs” are infinite…).

frameworks (sub-contracting, delegation, rules …) and take

The price tells the cost as the clock tells the time: those

on various forms. For example, the user fees for household

benefiting from a service (or who creates the “need” for it)

waste collection can be paid either as a tax or an annual

also know that they must bear its cost, divided according to

charge, depending on the expected use of the service, or

the benefits obtained. Any demand disappears when the

as payments based on the weight or nature of the waste

user fees are in excess of benefit the user obtains.

collected, as vouchers, the purchase of rubbish bags, that

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 29

4. Local taxation questions: developing economic arguments

User fees also seek to limit “stealing the silver” types of

they buy in function of the price. As a result, they are

economic agent knows that he can benefit from a public

conditions are necessary here. First, that public

having to bear directly and individually its cost, which is

no sense. Next, the cost of exclusion by price (which is

behaviour. This kind of behaviour occurs when an

obliged to reveal their preferences. A further two

service even if he does not express a request for it, without

services are not compulsory, otherwise exclusion has

distributed through taxation instead of fee-charging. The

added to the cost of producing and distributing the

“principle of equivalence”, which links price and service, is

service) must not be too high. This is more and more the

an obstacle to this strategy. With the user fee as the “price”

case in developed economies, where the costs of

of usefulness that the consumer-payers derive from it: the

example, for urban tolls). In the DC, this criterion

of the public service, the demand is expressed at the level

exclusion are decreasing steadily at the margin (for

not-free-of-charge character of a service encourages a

obviously raises problems of access to basic services

thrifty usage of resources, and thereby “allocative”

(such as water), poverty and the financial capability of

economic efficiency.

potential users to pay for services; a solution must be

found to these problems before introducing the principle

Finally, as the public service is paid by the user and not by

of equivalence.

the taxpayer, this market-type mechanism also conveys a

certain conception of distributive justice. It obeys the “from

3) Mild supply indivisibility. Supply indivisibility seriously

justice, which replaces the customary tax principle of “from

particular because the equal price at marginal cost rule is

each according to what he consumes (or uses)” principle of

complicates fixing charges for public services, in

each according to his capacity to pay”.

not applicable. Supply indivisibility means that the

production of a public service makes it possible to serve

several users simultaneously: once a unit of service is

User fees, directions for use

First of all, by virtue of their founding principle, it is

produced, the same unit can, more or less fully, be made

advisable not to use fees as a source of undifferentiated

available equally to all individuals in the group. The best-

local revenues. Fees must only be used to finance clearly

known example is a television programme. What real

defined services.

costs are generated by the tuning-in of one additional

television set to the programme being broadcast? Almost

This principle, however, does not apply to all public

none. Why, in this case, forbid a household that would

functions. In order that its use be justified, a set of

derive positive satisfaction from it to see the programme?

conditions needs to be fulfilled simultaneously: technical

The well-known optimum rule according to which goods

conditions, ethical conditions and legal and financial

and services must be sold at their marginal cost leads in

conditions.

this case to a zero price. On the other hand, if the supply

is not totally indivisible (therefore mildly indivisible), that is

Four technical conditions must be fulfilled (Dafflon,

to say that providing the service to an additional user

2001).

involves an additional cost, then a zero charge for the

1) The ability to identify beneficiaries. For the

service is not justified. In reality, this case is much more

for users only if they pay its price, it must be possible to

case for gas, electricity, telecommunications, public

advantages derived from a public service to be reserved

frequent than that of a totally indivisible supply; it is the

identify and individualise these persons. Consumption

transport, the management of natural resources and the

is then said to be divisible.

environment, water distribution, sewage evacuation and

treatment, waste sorting and incineration. However,

2) The ability to exclude. Users who do not pay the price

even in the case of moderate indivisibility, the marginal

of the service are excluded from consuming. The ability

costs can be low if the fixed costs are high compared to

to exclude obliges individuals to modulate the quantity

the variable costs. In this case, other methods must be

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 30

4. Local taxation questions: developing economic arguments

used (average cost or binomial charges, for example) to

foundation of the financing of public services through fees

determine the charge.

is contingent on the concept of the distributive justice of

equivalence (the person who benefits pays), and, in some

4) Mild externalities. Public services for which a scale of

cases, even allows a surplus to be generated that can be

fees is envisaged must not benefit at the same time too

redistributed according to other criteria.

large a number of persons other than the user-payers.

Indeed, the risk would be then to have joint production

Finally, it assumes that some legal, economic and

of at least two products, one for which a fee is paid by

financial conditions, which vary with national laws, are

consumers who express a demand for the product, and

met.

the other that has characteristics close to those of a pure public service which is free of charge, which

In general, six main conditions are set for the use of fees:

seriously complicates the setting of economically

1) legality: resorting to fees must be authorised by law;

efficient prices. This is the case for example of a service

2) financial equivalence: the fees must be proportionate

which benefits at the same time the whole community (pure public good), and for which a part of the

to the benefits provided by the public services in

community, composed of individual consumers, accepts

question;

to make itself known as such. In this case, it is

3) equal treatment of users: there must be no tariff-

unreasonable to ask the latter to bear the total cost of

based discrimination—other than that of the benefits

the service through user fees, since this would mean

derived from the facilities—depending on revenue or the

neither equity among individuals, nor an optimal

commune to which the user belongs;

allocation of resources. In the case of a positive

externality, the declared consumer-users would only

4) cost covering: the fees must cover at least a part of the

accept to contribute financially at the level of their own

costs (which raises complex accounting problems,

consumption, ignoring the shared consumption of the

cf. Table 8); if there is a surplus, this must not be

rest of the community. The service would be under-

allocated to the general budget or to other fee-based

produced, as private decisions would then not take

services (no cross-subsidisation);

account of the positive social effects. Public finance

5) the fee must be paid either by the actual user or by

theory proposes correcting this situation through

the potential beneficiary (who has excluded himself

subsidies, financed by taxation.

voluntarily from the group of beneficiaries);

In fact, as the analysis of local taxation in the EU-25 has

6) the tariff must follow a well-defined economic and

clearly shown (cf. Section 2.), although user fees are

financial logic.

frequently used by the local governments in developed countries, their quantitative importance is somewhat

The founding principle of user fees is thus to attribute

secondary and only slowly increasing (around 15-17% of

budgetary and financial costs to groups of users, and to link

total revenues in the UE 25 countries).

receipts to fees. Its practical application requires a precise classification

Some political and ethical conditions are then needed.

of

costs

distinguishing

fixed

costs

(independent of the volume of services provided, the

On the one hand, financing through user fees must be

demand or the number of potential users) from variable

politically justified, notably by providing proof that this

costs. The variable costs represent the minimum

option limits the use of more costly and less efficient

minimorum below which the charge for the service must not

financing procedures (such as rationing, for example). On

descend (a service to a neighbouring commune, for

the other hand, the service for which a fee is charged must

example).

not be subject to obligatory free access. Thus, the ethical

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 31

4. Local taxation questions: developing economic arguments

long term, and therefore a surcharge must be

charged in order to finance it.

The main difficulty involves identifying the fixed costs, which

2) Financial equilibrium

can take various forms: interest and amortisation, certain

If returns increase, setting tariffs at marginal cost

administrative expenses such as the costs of managing

produces a financial deficit; in order to cover the costs,

applications or conducting surveys, certain operating costs such as statements of account, or quality control.

it is advisable either to charge at the average cost

The second difficulty stems from the necessary sharing of

demand), or to apply a “binomial tariff” where each pays

(leading to a price increase and thus a decrease in

fixed costs in the case of a joint product. For example, in the

a flat-rate charge that is equal to a share of the

case of a dam that simultaneously supplies drinking water

difference between the average cost and the marginal

and serves as a reserve for irrigation and fire-fighting, the

cost (for example, in the form of a “subscription”

sharing of the fixed costs between these three uses makes

adjusted to the type of counter, the number of taps…),

it possible to assign their cost to the users of each service

and a user fee calculated at the marginal rate (volume

(Dafflon, 2001).

consumed).

Choosing the tariff

costs of providing the service (and therefore the

Symmetrically, if returns are decreasing, the marginal

This is a complex choice. It is made by inter-relating a series

charges applied) increase with the volume of the

of objectives that may be contradictory. A practical tool, often

service consumed. They exceed the average cost and

the criteria to be retained and facilitates joint decision-

must be redistributed.

recommended (Dafflon, 2001), is a decision matrix that lists

therefore make it possible to obtain a surplus, which

making.

3) Simplicity

There are five main objectives to keep in mind.

The insistence on simplicity requires that the fee be based on a simple formula enabling citizens to

1) Allocative efficiency

understand what is at stake in the solutions on which

The tool here is setting the tariff at marginal cost, which

they must express an opinion, and allowing the

ensures that the sum of the individual payments

commune to reduce administrative costs (fee collection,

(marginal value of the service for the users) covers the

information processing …).

cost of production at the margin.

4) Predictability

This may not be the case if: some

If the calculation of the fee is based on a formula whose

prior rights gave “free-of-charge” access (risk of

components are difficult to predict, the costs will either

waste);

the

not be covered or be more than covered. All tariff-setting

service provides joint products (drinking water +

formulas are not equally useful from this point of view. It

(having the potential beneficiaries of the fire reservoir

nents that are reliable and easily quantifiable, and the-

fire reservoir) and the marginal provision is “too low”

is advisable to choose those that are based on compo-

pay and not those who only use the drinking water);

in

refore relatively stable over time. For example, the cal-

the case of increasing returns, costs are not

culation of a connection fee that is based on data origi-

covered (financial deficit) and in the case of

nating from a town-planning document (such as a land

decreasing returns, the fees provide a net surplus;

setting

use plan) is preferable to formulas based on consump-

the tariffs at (short term) marginal cost can

tion information supplied by users.

lead to using equipment to the limit of its capacity; it

will be necessary to develop the equipment over the

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 32

4. Local taxation questions: developing economic arguments

5) Equity

ted at the margin. While in principle this logic leads to

fees that are different from one user to another, in reali-

In the logic of the user-pays criterion, the fees concern

ty it creates homogeneous charges for homogeneous

only the users and not the taxpayers, they are proportio-

categories of consumers.

nate to the benefits received, and the benefit is calcula-

Box 4. Conclusion User fees are an indispensible tool for financing local public services. However, they do not constitute a panacea to this end. Their use must fulfil various conditions. Accordingly, it is necessary to:

- ensure that the product or service for which a charge is made meets the technical conditions for its use;

- ensure that reliable statistical data is available, which allows tariffs to be calculated on the basis of economic costs (and not only on the basis of accounting costs);

- have a legal framework (legal principles: of financial equivalence—proportionate to the benefits received; of non-discrimination— discrimination according to the benefits received but not to income or the commune to which the person belongs; no tariff equalisation);

- justify each exemption or each exception to the tariff rules;

- justify any apparent limitation of the principles of free access to public services and to the equality of treatment for all citizens;

- set up and sell the user fees system at the political level.

Table. 6.

Proportion of user fees, as % of current resources for various countries (1980s)

Water supply

United Kingdom

nd (not defined)

7

nd

6

nd

15

16

Sanitation

nd

Swimming pools

26

Household waste collection Libraries Parks

Sport/Leisure Cemeteries

Source: Prud’homme, 1987.

United States

84

8

35

Denmark nd

New Zealand 9

nd

44

17

nd

nd

nd

86 nd

nd

nd

16

nd

nd

nd

nd

32

16

nd

nd

nd

43

25

40

43

Ireland

7

nd

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 33

Belgium

nd nd 89

4

nd

nd

13 nd

4. Local taxation questions: developing economic arguments

4.2

Which local taxes to apply to residents?

In a large number of countries, residents are subject to

in the sense that it does not respect the principle of the

Commission counted 33 different taxes in France). Given

“graduated”

numerous local taxes (in a 1989 report, the Tax

ability to pay. And when it does (a capitation tax

this situation, experts have focused on the question of the

distortionary.

choice between a land and property tax, capitation taxes and personal income taxes (Gilbert et al., 1998).

in

function

of

income),

it

becomes

Local capitalisation tax

For decades, the archetype of the local tax has been the taxation of land and property values. The close

The impossible challenge of the capitation tax

For the economist, the flat-rate tax (capitation tax being

interrelationship between the benefits derived from local

theoretical level. Technically easy to levy, impossible to

inevitable role of the spatial dimension, have been present

one of the variants) has several advantages at the

public goods and the formation of land rents, and thus the

transfer to another person and visible, it thus clearly

in the literature on local public economy from the outset,

all, it does not create any distortionary effects. In theory,

however is quickly “cancelled out”, either by the assumption

“tells” the costs of providing public services. And above

especially in Tiebout’s (1956) founding model. Space

these characteristics should make it a good candidate as

that the actors are immobile (as in the models of fiscal

a local tax. However, the poll tax does not have only

behaviour models), or by a rather rough representation of

virtues. Firstly, it is not as easy to levy as is often claimed

locations, which is most often purely ad hoc (as in the tax

Secondly, it is non-distortionary only under certain

focused on land and not distance. However, analysis of the

(the mishaps of the Poll Tax in England testify to that).

competition models), and to all extents and purposes

conditions (the local public services must “not spill over”

process of tax capitalisation, based on the estimation of

preferences irrespective of the commune they live in and

local budgetary decisions have an important impact on

the limits of the commune, individuals must have identical

hedonic functions, generally validates the assumption that

their location-related decisions must strictly obey the rule

ground rents (cf. Box 5).

of “equivalence”). In addition, the capitation tax is unfair

Box 5. Empirical testing of the tax capitalisation hypothesis

Despite their interest, there are relatively few econometric estimates based on the adjustment of hedonic functions, largely due to the high

cost of collecting data on land and property transactions. The results of tests carried out in France, for example, show that one cannot reject the hypothesis that at least part of the profits from local public goods and from land and housing taxes are capitalised into property values.

The first attempt at econometric verification of the hypothesis of tax capitalisation was carried out on 900 transactions of privately owned houses (secondary market), completed in 1980 and 1983 in 70 communes in the suburbs and outer suburbs of Rennes (Guengant, 1992).

The statistical adjustment of the envelope of the set of curves relating to the property sales covers around two-thirds of the observed

variations in price. The relatively high quality of the estimate, especially for individual data, suggests that property sales are not exempt from

certain general determining factors, like the distance from the centre of the built-up area, the local services proposed and the local tax rates.

Thus, in 1983, a lengthening of the time needed to reach the centre reduced secondary market house prices by 4,000 francs per additional

minute ceteris paribus. The statistical adjustment means that the hypothesis of tax capitalisation is not to be rejected. For the sample studied, a progression of 10% in the level of local public services per inhabitant increased the sales value of the houses benefiting from the services

by around 2%. Inversely, a 10% increase in the property tax burden reduced purchase prices by 4%, ceteris paribus.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 34

4. Local taxation questions: developing economic arguments

The practical impact, however, of the tax model of property

asset can generate income (virtual or real) from the capital,

capitalisation must be kept in perspective; first of all for

which is a sign of the ability to pay.

theoretical reasons, due to the necessarily restrictive

This kind of tax is very widely employed in developing

assumptions of the model (cf. Box 5), then for practical

countries by the urban municipalities but is generally

reasons. A property tax requires: (1) a recognised land

subject to limits imposed by the central government, which

registry, that is published and accessible, kept up to date in

in some cases can refuse reassessment of the rental value

the long run; (2) the capacity to identify owners and follow

that serves as the tax base. The capitalisation tax that is

transactions; (3) the regular updating of the assessments of

levied on households through the land or property tax is, in

land and property values, if the basic unit of measure is

theory at least, the tax most likely to respect the principle of

other than the square metres of the plot areas; (4) a single

profit, if the market value of the land or property assets

rate at the local level for all the land and property assets in

capitalises positively the services provided by local public

order to respect a neutrality between housing, productive

facilities, and negatively the resulting tax burden. It can also

activities and zones of public interest; (5) the ability to

be considered as respecting in part the ability to pay, since

manage this tax, particularly its invoicing and collection, the

this is increased by the valuation of the asset. The criticisms

settlement of disputed claims and the legal guarantee of the

levelled at the property tax point up the fact that it is visible:

amount of tax owed by the taxed real estate. Its

the residents can be reluctant to pay it especially if they do

administrative and compliance costs are therefore high. In

not see any return in terms of public services. In addition,

the absence of up-to-date and adequate data on land and

the property owners called upon to pay this tax are often

property transactions, use is often made of the

those who decide the local tax agenda.

capitalisation of rents instead of market values. This practice gives rise to numerous distortions; in fact, the

The extension of property tax to enterprises would appear

market value of a hovel in a town centre is very much higher

to be fully justified at the local level, since a priori nothing

than the capitalised value of its rent, because it is

justifies that households and enterprises be taxed

established in function of the value of the land after

differently in this respect. However, this type of

demolition of the existing building and restoration. The

land/property tax on enterprises can lead to distortions. As

market anticipates the present and future services rendered

the analysis of incidence has clearly shown (cf. Section

by housing better than the taxman.

3.2.), land and property capital is only one of the factors of production for an enterprise, and the mere fact of levying

Finally, there remains the problem of the equity of

this tax may encourage the enterprise to modify its

capitalisation tax. The problem is different according to

production techniques. The choice of one factor rather than

whether it is a question of taxing owners or tenants,

another may determine a spatial and sectoral distribution of

whether the latter are owners or not. In the first case, it can

the tax that is not consistent with economic efficiency.

be claimed to be fair both from the point of view of

Moreover, from the equivalence perspective, local

equivalence or from that of the ability to pay: in fact, from

governments bear the costs, related to the installation of

the point of view of equivalence, the tax merely recovers the

businesses, that depend on all the factors of production use

“windfall gain” that the owners derive from the fact that the

in the production process and not only on the fixed assets.

asset can potentially benefit from local public services. And

from the point of view of the ability to pay, possession of the

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 35

4. Local taxation questions: developing economic arguments

Personalising local taxes and income tax

On the other hand, nothing in principle prevents local

However, it often takes on a truncated form, which makes it

distortionary effects, provided that the power to set local tax

Local taxation of income exists in a great many countries.

income taxes from being levied without creating major

more a mechanism for shared or even transferred taxation

rates is relatively limited. This is the case in “tax coefficient”

than a strictly own-source tax.

or “piggyback tax” arrangements, where setting the local

rate does not jeopardise the progressive character of the

The theory of financial federalism, as we have seen, is very

tax schedule, which it affects only homothetically. This

reserved as to the desirability of an own-source tax on

solution has the following advantages: (1) the simplicity of

income. A first argument concerns the issue of equity

applying it (the tax schedule and base remain identical for

between individuals. In fact, a local tax on income is less

the whole country); (2) its capacity to adjust to the budget

discriminating than a national tax; thus, a poor person in a

needs of local governments—subject to the constraint of

rich municipality will in general be better treated than a poor

the current budget being balanced; (3) it does not seriously

person in a poor municipality. The second argument has to

challenge the redistribution objectives of this tax. For the

do with efficiency. The agents’ mobility makes the

majority of the DCs, there is also the fact that (4) income tax

redistribution inefficient at the local level, except in the case

is, to a large extent, a tax on salaries paid in the official

where the agents limit the desire for redistribution to an

sector, as it is difficult to know the income of individual

internal distribution to the agents within the community—

workers and the incomes derived from capital.

the redistribution then becomes a sort of “club good” or a “local public good” (Pauly, 1973).

4.3

Which local taxes to apply to businesses?

Contrary to common opinion, local taxation of businesses is

production costs, and thus reduces proportionately the

belong to the EU-25 (cf. Section 2.). However, it does raise

the local tax is a case of vertical tax externality (cf. Table 5).

be levied, the discussion concerns the choice of the tax

the territorial taxation of businesses covers a diverse range

of its rate in a competitive economy. As a core subject of

varies significantly from one country to another, at least in

relatively widespread, at least among the countries that

national tax on profits. This means that the deductibility of

numerous questions. Apart from the ease with which it can

Likewise, in most countries, apart from the United Kingdom,

base and the acceptable degree of the territorial inequality

of taxes. The main difference concerns the tax base, which

reflection, the potential influence of the local tax burden on

the detail. As a broad outline, in fact, two kinds of taxation

the location of businesses constitutes the keystone of

stand out. In Japan and in Germany, corporate profits

communal strategies for local economic development.

constitute the dominant component of the tax base. In the

United Kingdom, Belgium and the United States, the tax is

The main industrialised countries all have a local business

imposed exclusively, or primarily, on industrial and

tax system. A comparison of the legal modalities of the tax

commercial real estate. The taxation of businesses here is

reveals features that are both common and specific across

no different from that of residents.

countries. In general, the local tax is always a component of

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 36

4. Local taxation questions: developing economic arguments

Box 6. The singular position of France: the taxe professionnelle In this classification, France occupies (or rather used to occupy, before the abolition of its business tax, the taxe professionnelle was announ-

ced) a singular position. Taxes on property, as in the British or American models, are in fact supplemented by taxes on technical capital, as

is the case in Germany, and on labour, which is not the case in all the countries mentioned. In reality, the business tax retains the principle

of taxing added value, even if until now political constraints have opposed its application. As a result, the business tax is applied very une-

qually to income from the factors of production. The tax distortion would seem to penalise capital in favour of labour. This bias is increased

by the inclusion of property taxes on built and non-built properties. The integration of the salary-based transport payment (VT, versement

transport) does not re-establish the neutrality of the tax with respect to the added value. Consequently, the burden of the tax is increased for heavily capital-intensive enterprises, such as power production and distribution industries (4.15% of the added value), industries producing

intermediate goods (3.71%) or equipment (3.67%), and decreased in labour-intensive sectors, such as services (2.36%), insurance and financial institutions (1.33%).

The desirability of taxing enterprises at a local level divides

not of “services provided” or of “equivalence”. In fact,

concern either the distortions of competition generated by the

operating results of businesses and a municipality’s capital

public authorities and economists. The standard objections

nothing guarantees any kind of correlation between the

territorial inequalities in the tax burden, or the uncertainty as

investments. In addition, the periodic instability of industrial

to the impact on contributions, via the particularly complex

and commercial profits is hardly adapted to the method of

and difficult-to-control channels of fiscal incidence. Insofar as

financing territorial communities, characterised by their high

throughout the national territory, local business tax is to all

narrow scope and specialised nature of local economies

it places the tax burden on the whole economic system and

and recurrent operating and investment costs. The relative

appearances a localised tax, when in reality it is not. Hence

mean that they cannot rely on cross-sector compensations.

between fiscal practice and reality, notably by nationalising the

divided into small units (as is the case in France). However,

the many projects that aim to re-establish equivalence

The risk of instability increases when municipalities are

tax and linking it to an equalisation of its receipts.

the enlargement of tax jurisdictions does not eliminate the problem, as is shown by the example of Germany.

On the other hand, the arguments in favour of maintaining a local business tax cite the specific costs of urbanisation

Furthermore, this kind of tax is easily manipulated by

a commune. The legitimacy of the tax is expressly integrated

particularly true in the developed countries), which poses

incurred when industrial and commercial businesses set up in

playing on transfer prices between affiliates (this is

into the perspective of spatial efficiency, and therefore into

the problem of the division of tax bases between sub-

financing municipal costs in proportion to the location costs.

central levels of government since, by definition, it is difficult

From this particular viewpoint, two questions arise. First of all,

to “territorialise” a tax based on profits.

which tax base provides the most satisfactory approximation

Unlike the tax on household income, business tax can give

of the costs incurred by the enterprises? Next, is it possible to

rise to complex mechanisms of incidence, as is suggested

distribute the costs of urbanisation objectively between the

by the theory of fiscal incidence in general equilibrium

inhabitants and the businesses?

analysis. If the purpose of local taxation is to precisely

In view of the targeted objective, selecting a tax base that is,

identify the final taxpayer, and to avoid mechanisms of tax

satisfactory solution.

recommended. Overlapping local and national taxes on

if not optimal, at least acceptable does not offer a totally

exporting and importing, levying a local business tax is not

profits will certainly re-launch the question of vertical tax

In the first place, the local taxation of profits (along the lines

externalities.

of the tax on company profits) offers very few advantages.

To start with, it has a logic of “contributive capacities” and © AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 37

4. Local taxation questions: developing economic arguments

In addition, the tax on company profits is often employed in

On the other hand, enterprises use simultaneously several

which, in principle, should not be controlled by local

labour), in proportions that vary highly from one business

the framework of macroeconomic stabilisation policies

factors of production (property capital, technical capital,

governments.

sector to another and from one company to another. A local

tax levied on a single input, in this case the fixed assets,

The taxation of land, industrial and commercial capital

runs the risk of causing inefficient technical distortions in an

would seem to offer a better solution for the targeted

attempt to reduce the tax. Furthermore, the diversity of

objective. For the inhabitants, does the capitalisation tax

production combinations lends little credibility to the

based on the market value of houses not offer, with certain

reservations,

an

optimal

method

of

hypothesis of a linkage between the urbanisation costs

financing

borne by the communes and land, industrial and

municipalities? Apart from the above-mentioned uncertainty

commercial capital alone. Consequently, a municipality’s

as to the efficiency of the taxation of urban income, any

specific local taxes should rely on the production capacities

broad-brush transposition of the residential model onto

present on its territory, and thereby on the overall volume of

enterprises would leave aside a key issue. In fact, land and

the inputs used. In this event, the added value could

property capital constitute the sole factor of production of

provide a sound practical tax base, at the same time neutral

housing services. There is a direct relationship between the

with

valuation of assets and the valuation of housing services,

respect

to

the

production

combination

and

representative of the municipality’s economic potential.

notably through the impact of the public service benefits

However, the choice of a tax base does not mean this is the

resulting from local public facilities. As a result, distributing

end of the matter. There is also the decisive choice of the

the tax burden in proportion to the market value constitutes,

tax rate and thus the question of how to distribute the tax

at least in theory, a sharing that is proportionate to the

between businesses on the one hand, and inhabitants on

benefits obtained from local services.

the other.

Box 7. The influence of the local tax burden on corporate decisions about location In many countries, one observes a negative correlation between the high number of tax bases relating to economic activities, and the level

of the local tax rates on these same activities. France is no exception. Should this be viewed as the result of the threat hanging over every

commune like the sword of Damocles: the danger that companies will relocate if the rates are too high? Reducing the tax rate would

encourage businesses to settle in a given place, lured by fiscally attractive communal sites. Or should it rather be seen as the automatic

consequence of the small number of bases, which makes it necessary to have high tax rates in order to ensure a sufficient tax revenue, the disparities in rates then having nothing to do with eventual relocation behaviour?

The first scenario supposes that the actions of municipalities have an effect on the location of enterprises and, incidentally, of households.

The use of the fiscal instrument, but also of the land instrument via the creation of adapted zones, would make it possible to influence

businesses when they are choosing where to locate. Thus communes would then have the means to promote local economic development.

However, the widespread drive to attract enterprises will inevitably create competition between territories, be it at the level of an urban unit

(competition inside a city), at regional level, country level, or even across borders (competition between cities).

Unlike in France, there is an abundance of economic literature in the United States about the role of local taxes and public services in the choices of where businesses locate. Apparently, municipalities do not have much influence on the choice of business locations. A recent

survey of research into this subject in fact suggests that neither local budgetary and fiscal variables have any measurable impact, or only have a marginal influence, at the limit of the generally accepted significance thresholds for such studies, and therefore tricky to interpret.

Since the 1960s, American research has also come to the same conclusion, with nuances that are too slight to weaken the results. However,

a more thorough examination of the models reveals numerous theoretical and econometric doubts about their findings. In spite of appearances, the problem does not seem to have been solved.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 38

4. Local taxation questions: developing economic arguments The most recent work in fact nuances the traditional conclusions. Research suggests a hierarchical process in the choice of location. Once

the company has taken the decision to invest, a first spatial arbitration will lead it to select, between regions and/or cities, the most suitable site, taking into particular account the level of salaries relative to labour productivity, transport costs, the price of raw materials (for companies

that are targeting a national market, and are therefore guided mainly by factors relating to production costs) or the growth potential of local

sales (for companies looking for proximity to consumers). Next will come the choice of the precise site within the urban perimeter, on the basis of new location parameters (everything would seem to indicate that these will be different from the preceding ones, at least for what is

essential). In fact, inside zones of major employment, the greater mobility of workers encourages the equalisation of the salary/productivity

ratio, even if a territorial segmentation of the labour market always appears to exist to some extent, in particular in the large metropolitan areas.

In the case of micro-locations, the supply of sites should play a decisive role, notably via the cost and availability of land, administrative

zoning, the presence of public infrastructures or, in agglomerations divided into small administrative units, the local tax burden. In view of the

(non-exhaustive) list of these potentially decisive elements, it seems surprising that the models are unable to identify any specific impact of

local arbitrations. In fact, the majority of the factors mentioned are, directly or indirectly, under the control of municipalities. Does this mean

that the generally negative conclusion drawn from the statistical analyses is to be attributed to mistakes in the econometric design of the

models? Or are there theoretical arguments that can explain this result?

Tax capitalisation could explain this neutrality (although it can be asked if this is apparent or real) of the inequalities in tax rates. Over a long

period, the hypothesis of a relatively high mobility of industrial capital and labour cannot be excluded a priori, which enables these two inputs

to more or less entirely avoid local tax disparities. On the other hand, property capital, which by nature is spatially immovable, does not have the same possibility and may have to bear the main or even the total tax burden. Hence there is the possibility, at least in theory, of integrating

inter-communal tax inequalities into land and property values. Tax capitalisation, if it exists, can only be created by the offers of mobile agents

searching for an optimal location. Theory then suggests that there is a game of communicating rooms between the level of the local tax

burden and the bidding price for industrial plots of land, submitted by those intending to locate there. Adequate flexibility in the cost of land would be created by competition between communes. The enterprises would thus not be necessarily indifferent to the financial and fiscal

conditions of their installation. As a result, the municipalities’ tax arbitrations would be both neutral a posteriori, as they would be capitalised in the overall land tax, and active a priori, as they would have a hand in determining the differential ground rent.

Two conclusions can be drawn from this. On one hand, for the communes to have a coherent policy concerning the supply of spaces means

that they must have overall responsibility for the land tax and not just the control of the tax burden, which is inoperative when there is no

flexibility in the price of land. On the other hand, in the event that local taxation has no impact in a competitive situation, this does not mean

that municipalities are exonerated from all fiscal responsibility for local development. In fact, even if the flexibility of land rent enables new

businesses to offset high taxation, the tax surcharge will reduce the landowners’ capital by the same amount or will inflict (particularly given

the incompressible land investment costs) operating losses on developers, which are often public entities.

In France, recent statistical analyses of business locations do not give reason to totally reject the hypothesis of capitalisation, but neither do they justify its full acceptance. The ambiguity of the econometric results can be partly explained by the lack of precise data. The debate about

the influence of the local business tax on local economic development thus remains wide open.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 39

4. Local taxation questions: developing economic arguments

4.4

Local taxes on consumption: can VAT be decentralised?

For a long time taxes on consumption were the mainstay of

the central government. All these conditions make it

a result of the development of communication, of being

on retail trading are also problematic as there are obvious

local taxation. Almost everywhere their use is decreasing, as

unrealistic to use this tax in the developing countries. Taxes

difficult to administer and of the perverse effects associated

administrative difficulties to collect them from small traders

with overlapping taxes. Very logically, this kind of tax has

(such taxes exist in certain countries but are levied almost

become the exclusive prerogative of nation-states, at the

exclusively on luxury goods). On the other hand, nothing

same time as customs duties.

prevents large governmental units (regions, for example) from benefitting from VAT revenues, on the basis of a shared

A study of local taxation among EU countries, however,

or transferred tax regime. Very wisely, the European

shows that taxes on consumption have an important place,

Community texts limit the shared use of VAT on

not as own-source taxes, but as transferred tax revenues or,

consumption to national governments, or to the European

in the best case, as shared tax revenues. However, it is rare

level.

for the local level to have any power whatever to adjust the

tax rates or bases.

But the question can be posed in a different way, suggesting an answer that is a little more nuanced and more realistic

The prevailing opinion on this subject considers VAT as a

than the previous one.

bad candidate for local tax (Bahl, 1999). However, the question deserves closer examination.

Added value is at the same time the difference between the

value of products sold and the value of intermediate

For sure, VAT on consumption (of the type found in the EU

consumption, but also the sum of the remuneration of

community), levied according to the regime in the country of

factors, be it labour or capital. To put it simply, it is the sum

destination, would lead to insurmountable technical

of the payroll and of the gross operating surplus (GOS).

problems if it became a local tax. In fact, in most regimes,

Nothing in fact prohibits taxing this base at local level, as the

exported goods are subject to a zero rate when exported,

many national examples suggest. For example, this is the

whereas imported goods are taxed at their point of entry

method that the French local tax authorities use (or formerly

onto the territory. Maintaining the tax at the rate of the

used) to fix the ceiling (and level of minimum contribution) of

country of destination would inevitably raise the question of

the taxe professionnelle, which is calculated on the basis of

VAT being reimbursed by the local government where the

a business group (and not a business establishment) using

exporter is resident. It would also imply that the tax revenue

the above method. Thus, the share of GOS can always be

corresponding to the import tax be paid to the local

optimised without necessarily invalidating the tax system as

government where the point of entry into the country is

a whole. The rates applied in the communes must therefore

located.

not be too different, which will certainly limit their eventual usage to large authorities and not to micro-territories.

Moreover, VAT is not an easy tax to manage at the subnational level, except if a uniform tax base is imposed for the whole national territory, and if local governments are

authorised to levy a rate that is added to the rate chosen by

Š AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 40

4. Local taxation questions: developing economic arguments

4.5

How to share the taxes between the levels of government?

It would be illusory to look to economic theory alone for an

The method of sharing is in itself important, and can be

answer to this question, which is valid in every place and for

either “ascending” or “descending”. Lastly, every attempt to

all time. On the other hand, one can try to construct a guide

share taxes between levels of government comes up

that is sufficiently general to cover all aspects of the ques-

against limits that must be kept in mind.

tion, with a combination of principles and commonsense.

Table 7.

Criteria

Matrix for choosing the distribution of taxes between the levels of government

1. Economic efficiency (no waste of resources)

Choice of base

1a) No “tax externalities” (the tax must not have any effect on economic actors located in external localities. It must not have a mobile base, nor generate either spill-over effects or “tax exporting”).

1b) If it is a tax on goods and services, it must be possible to adjust its rate in function of the price elasticity of the demand for the taxed goods.

1c) It must be possible to adjust the tax in a way that truly reflects the differences between communes in terms of tax preferences.

1d) It must be possible for the tax to be “perceived” without bias or “illusion” by the taxpayer so that he can know the “true price”, that is to say the costs of providing public services.

2. Flexibility

The tax must change swiftly and in full in response to variations in the level of economic activity.

3. Budgetary equilibrium

3a) The tax must be individually proportionate to the value of the public goods and services provided by the commune (principle of “micro-equivalence”).

3b) The tax base must be proportionate, statically and dynamically, to the expenditure to be financed, in such a way that the tax rate is not too high (risking an efficiency loss), and does not fluctuate too much over time.

4. Accountability

The tax must be sufficiently transparent so that the political system can reflect the preferences faithfully.

5. Equity

5a) The tax must permit an equal tax treatment of equals (“horizontal tax equity”).

5b) The tax must make it possible to achieve vertical equity (according a differentiated tax treatment to unequal taxpayers).

5c) The tax must not exacerbate the differences in wealth between territories.

6. Administration of the tax

6a) The collection and supervision of the tax must not be expensive (administrative costs + compliance costs).

6b) The tax mush be easy to administer at the local level (localisable bases, local supervision possible).

6c) The collection and supervision offer economies of scale.

7. Capacity to express the territorial policy chosen

The tax does not conflict with the chosen policy of territorial discrimination (policy of “territorial development”).

8. Financial autonomy

8a) The tax is adapted to the competences exercised.

8b) The tax is conducive to the exercise of financial autonomy.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 41

Choice of rate

Collection & administration

4. Local taxation questions: developing economic arguments

Table 8.

Division and sharing of taxes and charges between levels of government

Types of taxes and charges Income tax

Taxation of individuals

Determining bases

C

Fixing rates

Collection and administration

C, I, (L)

C

Modalities for sharing* Yes

Problems Redistribution, mobility,

Taxation of companies Payroll taxes

C, U C, I

C, U C, I

C, U C, I

No (Yes) Yes

stabilisation Method of covering the cost of public

Business taxes

I

I

I

(N)

Method of covering the cost of

Customs duties

Integrated taxes (VAT)

(for example, welfare services)

the public services provided to economic actors

Taxes on the sale of goods and services

services provided to the workers

C

C

C

No

C

C, I

C, I, L

I, L

(Yes)

Land tax

I, (C)

L

L

No

Tax on immobile factor,

Tax on land and property

I, (C)

L

L

No

Idem

Taxes on profits, royalties

C

C

C

No

Very unevenly distributed bases

retail sales

Property taxes

capital gains Taxes on natural resources Severance taxes:

Production and fixed assets

C, I, (L)

C, I, (L)

C, I, (L)

(Yes)

International trade

C, (I)

Taxes on wholesale and

C

(Yes)

High administration and

compliance costs

Lower administration and

compliance costs

covering the costs of local productive systems (LPS)

User fees

Conservation charges

C, I, (L)

C, I, (L)

C, I, (L)

(Yes)

Preservation of the environment

Taxes on alcohol/tobacco

C, I

C, I

C, I

No

Taxes on betting, games,

C, I, L

C, I, L

C, I, L

No

Health competence shared between levels

Tax on carbon emissions

C, (U)

C, (U)

C

No

British thermal unit - BTU tax

C, I, L

C, I, L

C, I, L

No

Taxes on “vices”

lotteries, races Taxes on activities that pollute

Taxes on waste products

Global (national) fight against pollution

National, regional and local fight

C, I, L

C, I, L

C, I, L

Registration tax and

C, I

C, I

C, I

According to the level of government

Driving licence tax

C, I

C, I

C, I

According to the level of government

Road tolls

C, I, L

C, I, L

C, I, L

No

Parking fees

L

L

L

No

Taxes on activities that pollute (taxes on fuels)

Taxes on vehicles

annual taxes on the user

Other excise duties Flat-rate fees

C, I, L

I, L C, I, L

C, I, L

C, I, L

I, L C, I, L

I, L C, I, L

No

Local competence

No (Yes)

with this competence

No No

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 42

against pollution

with this competence

Tolls on national, provincial

and local roads

Local congestion

Taxes shared in function of residence Cover the cost of public services

4. Local taxation questions: developing economic arguments

Various user fees Taxes on assets

(annual taxes on capital, property

C, I, L C

C, I, L

C, I, L

C, I

C

No

(No)

Cover the cost of public services Redistribution

transfers, inherited wealth …)

Source: Shah, 2004.

Key L: Local governments (municipalities and groupings of municipalities) I: Intermediate levels (counties/départements, regions or federated states) C: Central State or federal level U: Supranational * If there are two solutions and sometimes parentheses, this indicates that there is no agreement in the literature (and that there cannot thus be two contradictory solutions), or that the solution is contested (which is indicated by the parentheses).

Practical application

There is also a risk of double taxation at the “horizontal”

considerations drawn from practical experiences of

do not manage to agree on how to share the tax bases. The

To the criteria listed above, one can add other

level, that is to say when two fiscally sovereign jurisdictions

decentralising taxation (Dafflon et al., 2008; Dahlby, 2001).

vertical and horizontal co-ordination of taxation is not only a

problem of fiscal technique, but it also raises real problems

Local authorities should focus on a limited number of taxes

of equity and of disincentives if it is not organised

and charges that potentially produce high revenue, and

appropriately.

forget the other less important sources of income.

Obviously it is not a matter of conforming to the myth of a

A local tax must be integrated into the underlying constraint

single tax, which is not desirable, if only because it is

to balance budgets, at least for current expenditures, which

paid, however, to ensure that these taxes are not

generations. The visibility must be immediate in time.

necessary to diversify the fiscal risk! Attention should be

prevents the tax burden being passed on to future

concentrated on too small a number of taxpayers who, as a

As with the methods of distributing competences between

result, would inevitably become actors in defining local

different tiers of government (cf. Table 7.), Table 8 offers a

budgetary options.

possible presentation of the distribution of tax revenue, of

A local tax must be visible for the taxpayers-electors, and it

user charges and fees between levels of government

must not be possible to export it onto persons residing

(Shah, 2004). On the one hand, it shows that sharing a

outside the jurisdiction that levies it. The visibility of the tax

power to tax often occurs between the regional and local

(as a fiscal pseudo-price) means that the quality of public

levels, even if the form that this sharing takes is not always

services should in return also be visible for the citizens,

specified (which is not obvious and is a matter for

without causing them to refuse to pay the tax. Exporting the

discussion, cf. Box 3). On the other hand, the author

tax, which amounts to transferring a part of the tax burden

assumes or mentions that an immobile tax base is

provided and its financing.

harmonisation and the cost of application to support his

to external taxpayers, weakens the link between the service

necessary, and he uses the arguments of vertical case.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 43

4. Local taxation questions: developing economic arguments

4.6

What fiscal autonomy for local governments?

The question of the fiscal autonomy of local governments is

invent taxes, that is to set tax bases, the circle of taxpayers,

government. It is central to the political discussion. It is also

the right to levy the tax; in other words, to collect and

level as well as at the normative or empirical levels

disagreements” (Dafflon, 2005, p.43). It is therefore not

unavoidable in all countries that have decentralised tiers of

the method of calculation and the rate schedule, as well as

one of the most complex questions of all, at the conceptual

manage, or at least be the first to do so, fiscal

(cf. Dafflon et al., 2008). Here the question of autonomy in

necessary to have all this leeway locally in order to levy the

the choice and level of local expenditures, or “budgetary

necessary (fiscal) resources. Today, local governments that

autonomy” (discussed by Dafflon et al., 2008), will not be

legally enjoy genuine fiscal sovereignty are in fact very rare.

raised.

The rise of unitary or federal nation-states has overall been

accompanied by a transfer of local fiscal sovereignty

(assuming that it existed before) to the national or federal

Concepts of financial and fiscal autonomy

Here the choice of concepts is crucial. In principle, the

parliament, whether this transfer was imposed by the centre

concept of financial autonomy should only be employed

or negotiated.

the financial resources it needs to finance at the margin the

Financial autonomy can be achieved in various ways. First

respecting some legal or constitutional constraints. This

recognised right of local governments to adjust at the

and which defines financial autonomy as the situation “of a

not control the other taxation rules) so as to collect the

resources it needs, without resorting to or depending on

(piggyback taxes). It does not require that they undertake

when a local government has autonomous means to obtain expenditures that it decides with full authority to incur, while

of all, thanks to simple fiscal flexibility, ensured by the

definition is very close to that used by Dafflon et al. (2003),

margin the rates for overlapping taxes (for which they do

commune able to obtain by its own means the financial

revenues needed for their sovereign financial choices

other communes situated at a higher level or at the same

the administration of the tax. It could even be suggested

level of government”. This definition is considerably

that fiscal autonomy does not, strictly speaking, involve

narrower than the one used, for example, by Guengant et

mastering locally the rate-effects; autonomy is achieved if,

al. (2005), which refers simply to the capacity to mobilise

without changes in the rates, the increased local tax

revenue in an autonomous way. For local governments,

revenue generated by the increased bases is sufficient to

respecting legal texts—to own-source financial resources

more counter-intuitive way, a large proportion of tax

constitutes the sinews of war: this autonomy alone can

a low level of local financial autonomy. These taxes,

having access—without any constraint other than

cover the expenditures at the margin. Lastly, and in an even

(decentralised taxes, user fees, income from own property)

transfers from higher levels is not always synonymous with

guarantee them the capacity to make choices that meet

transferred or shared by the central government, can well

need to be absolute; what matters more is the volume of

governments have freely consented to. For example, as

local preferences. Here again, financial autonomy does not

be the explicit counterpart for a fiscal devolution that local

resources that a local government can, at the margin,

Dafflon (2008) reminds us, when in 1934 the Swiss cantons

devote to financing its own choices.

ceded the sharing of direct tax on individual incomes and business profits to the Confederation, they demanded in

Financial autonomy, strictly speaking, does not require

exchange a 30% share of these tax revenues, with no

fiscal sovereignty, understood in the sense of “the right to

restriction of the use of these funds and provision for this in

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 44

4. Local taxation questions: developing economic arguments

the federal Constitution. There was in fact a formal vertical

was removed and replaced by an equivalent transfer.

revenues when calculating financial autonomy ratios

lasted from 1934 until 2007.

point of view this 30% share of the direct federal tax was

On the other hand, the local financial resources on which

Confederation could not decide otherwise—except by

can in no way be considered as own resources. These are

of equalisation between the Confederation and the cantons,

levels. The case of France illustrates this confusion

transfer that was not counted as the cantons’ own-source

Sharing direct federal taxes with the cantons therefore

(cf. Box 8.), even though from a historical and constitutional

legally due to the cantons without restrictions and the

the communes have neither a rate-effect nor a base-effect

amending the Constitution. In the framework of the reform

comparable in all respects to a flat-rate transfer from higher

this modification was voted in on 28 November 2004. As of

(cf. Box 8.).

that date, the cantons’ part of 30% of the direct federal tax

Box 8. Local financial autonomy in France Introduced in 2003 and presented in detail in the Framework Law of 2004, a new constitutional provision (Article 72.2, paragraph 3) seeks

to guarantee the financial (sic) autonomy of territorial communities. The constitutional provision stipulates that: "Tax revenue and other own

resources of territorial communities shall, for each category of territorial community, represent a decisive share of their revenue. The conditions for the implementation of this rule shall be determined by an Institutional Act.” The Framework Law of August 2004 specifies the

terms of this provision. It fixes the situation of 2003 as the point of reference and defines the own resources mentioned in the Constitution

which “apart from income derived from services and property, include tax revenues of all kinds for which the law authorises the territorial

communities to determine the rate, the tariff or the base, or for which it decides, by territorial unit, the rate or a local share of the base”. In

view of the above definitions, it is undeniable that the taxes of all kinds for which the law authorises the local voting of a rate, of a tariff or of a local share of the base, promote (if they do not strictly guarantee) local fiscal autonomy. On the other hand, the taxes of all kinds for which the law decides, by territorial unit, the rate, are potentially far from the field of “own” resources (thus autonomous in the sense of the

Constitution). This is because the local leeway here is quite different from that resulting from the free determination of rates. While the free

local setting of rates produces a certain and immediate budgetary effect, a contrario, when the local rate is decided by law, the municipality can no longer look forward to additional tax revenue, apart from the benefit of a positive base-effect, which is uncertain and time-lagged.

Taxes for which the legislator decides “a local share of the base” are even more problematic. This concerns taxes for which the legislator

decides the bases and the rates and of which he assigns a part of the revenue to a specifically named municipality. If, as is the case for the

part of the domestic tax on petrol products (TIPP) intended for the départements to finance the minimum integration income (RMI), one

supposes that the tax base (like the purchases of petrol subjected to the TIPP throughout France) is reasonably independent of a département’s actions concerning the RMI, one is indeed dealing with a transfer that is fiscal in origin, but whose proceeds are totally

exogenous, with no rate-effect or base-effect, and therefore with no bearing on the exercise of powers by the local government in question…

The inclusion of this category of taxes in the “own resources” is pure expediency; as such, it further empties the constitutional provisions of

the key element of precise normative content. One can add that the text of the Constitution in no way guarantees the autonomy of each

territorial community; it only targets “categories of communities”, namely the whole body of communes and groupings, all the départements or all the regions.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 45

4. Local taxation questions: developing economic arguments

Empirical measures of local financial autonomy

base, without another tier of government setting a ceiling on

government can be measured in different ways. The first

specific tax. But, as Dafflon (2005) has correctly stressed,

The financial autonomy of the regional and local levels of

the rates or on the amount of tax revenue collected from a

involves comparing own tax revenues of sub-central levels

giving local governments the right to decide the rate-effects

of government to their total revenues (OECD, 1999;

and the base-effects on local taxes does not however

Blöchliger et al., 2006). The OECD terms this measurement

guarantee that local expenditures can be financed even if

“fiscal autonomy”. From this point of view, fiscal autonomy

they have authority to deal with these effects. It may be the

is a sub-set of financial autonomy, since it comprises only

case that fiscal authority is granted for taxes with such a low

source revenues. This obviously does not make sense

revenue will be far from sufficient. Fiscal autonomy is then

government have greater leeway for their tax revenues than

a certain degree of fiscal sovereignty (or flexibility), but not

case. In the same vein, it is often proposed that the tax

developing countries and in the transition economies,

the part that concerns local taxes and excludes other own-

yield when compared to expenditure needs that the tax

inasmuch as one implicitly admits that sub-central levels of

only a facade hiding local financial incapacity. There is thus

for their non-tax revenues. Yet, this is not necessarily the

a genuine financial autonomy. This is often the case in the

revenues of sub-central levels of government be compared

where the property tax is assigned to intermediate or local

to the total tax revenues of public administrations

levels of government, which then define its contours.

(understood as the total mandatory levies collected by the

Symmetrically, the central government can also decide all

public administrations at all levels). This measurement

aspects of local tax bases and rates; local governments

comes up against the previous problem, since the “leeway”

then have no fiscal sovereignty. In spite of this, the revenue

of the sub-central levels of government is, in reality, very

from this tax, all of which is guaranteed as their own, may

often limited by the higher levels of government (including

be sufficient to cover their necessary expenditures amply.

for their own tax revenues). By distinguishing fiscal

autonomy and financial autonomy, these definitions create

A thorny issue is the fact that taxes that are levied in a very

a risk of confusion with the concept of fiscal sovereignty.

many countries by a single level of government, and the

resulting revenue is shared between several levels of

The OECD proposes other measurements: for example,

government (revenue-sharing). In this kind of system, the

calculating the proportion of transfers in the total resources

tax base and tax rates are generally (but not necessarily)

of sub-central levels of government (transfers over which

set at the national level (or at least by a higher level of

they very often have very little influence, particularly when

government). The degree of autonomy then depends on

these take the form of specific grants - see below). The

how much leeway the local governments have to negotiate

fundamental question that needs to be asked is in fact over

when defining the formula used to distribute the tax revenues between levels of government. It should be noted,

which resources do local governments have a discretionary power (leeway). It may be emphasised in passing that there

however, that the shares either received or paid by local

is unfortunately very little correlation between all these

governments (if the local level collects the tax and then

indicators of fiscal autonomy (which raises serious

transfers a percentage of it to the higher level) under a

methodological problems for empirical research that makes

revenue-sharing system, if they are general taxes acquired

use of decentralisation variables).

by right (for example, enshrined in the Constitution), leads to only a relative loss of autonomy compared to the share

For the OECD (1999) and Blöchliger et al. (2006), the

of revenue that is allocated or to specific grants (Dafflon et

degree of fiscal autonomy of local government is greater

al., 2003).

when they are free to modify their tax rates and set their tax

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 46

4. Local taxation questions: developing economic arguments

governments’ fiscal sovereignty and autonomy (it even

The OECD uses a classification that distributes taxes in

happens that the higher level of government—often the

(decreasing) function of the degree of control that local governments

have

over

their

tax

central government—offsets this lost revenue by covering

revenues. This

this lost revenue and compensating, in the form of

classification makes it possible to compare the OECD

transfers, the local governments in question—which causes

countries. However it is necessary to point out that some of

an additional loss of financial autonomy).

these indicators are simply not available for the developing

An important point that is often neglected but of

countries (or are incomplete). The following options are

consequence in fiscal autonomy is, obviously, the more or

proposed in the OECD nomenclature:

less pro-cyclic nature of the fiscal revenues that local

governments have. Similarly, it is clear that the vitality of tax

1) sub-central governments (SCGs) determine only their

bases must be taken into account (in other words, when the

tax base;

tax is more or less productive). Also along the same lines,

2) SCGs freely chose their tax rate;

one must not neglect the concentration of the tax base on a

3) SCGs freely chose their tax rate and taxable base;

limited number of taxpayers because this introduces an

4) tax revenues are shared, which implies:

additional risk factor for the local government in question.

a) that SCGs are free to determine revenue sharing;

b) that they must automatically be consulted in the

Finally, tax competition between local government units,

case of changes to the tax revenue distribution key;

such as yardstick competition, has an impact on local

c) that the distribution of tax revenues is determined by

governments’ fiscal autonomy. If competition causes them

a legal standard that can be challenged unilaterally

to lower the tax coefficient, for example, local governments

by the central government or more generally by a

can use their fiscal flexibility (downward adjustment), but

higher level of government;

this reduces their fiscal (and financial) autonomy by

d) that distribution may unilaterally be changed and

reducing the proportion of their own resources in their total

revoked by the central government;

revenues (unless in the medium term they find a larger tax-

5) the central government (or a higher level of govern-

base as a result of lowering the coefficient). Along the same

ment) sets the tax rates and tax bases allocated to

lines, tax base sharing by several levels of government has

SCGs.

an effect on local governments’ fiscal autonomy insomuch

as it generates vertical externalities between levels of

To conclude this section on fiscal autonomy, let us mention

government. In the same way, the vertical deductibility of a

three additional points:

local tax from the base or amount of tax to pay to a higher

level (for instance the central government) shifts part of the

The higher level of government can define a system of tax

tax burden to the national taxpayer and therefore calls into

deductions that is imposed on local governments, in all or

question the principle of local accountability.

part of the country, which reduces by as much the local

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 47

Acronyms and Abbreviations BTU tax

British thermal unit tax (United Kingdom)

DC

developing countries

EU

European Union

GDP

gross domestic product

GOS

gross operating surplus

IAE

economic activity tax (Spain)

IPP

personal income tax (Belgium)

IR

income tax (France: impôt sur le revenu)

IRAP

regional tax on productive output (Italy)

IRE

income tax (Italy)

IS

company tax (France: impôt sur les sociétés)

NMS

New Member States (EU)

OECD

Organisation for Economic Cooperation and Development

RMI

minimum integration income (France: revenu minimum d’insertion)

SCG

Sub-Central Government

SNA

sub-national (level of) administration

TA

apprenticeship tax (France: taxe d’apprentissage)

TCA

tax on turnover (France: taxe sur le chiffre d’affaires)

TIPP

domestic tax on petrol products (France; FR: taxe intérieure sur les produits pétroliers)

TP

business tax (France: taxe professionnelle)

VAT

value added tax

VT

transport payment (France: versement transport)

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 49

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Série Documents de travail / Working Papers Series

N° 1

A Poverty Forecasting Tool: A Case-Study of Senegal

N° 2

Les OMD et l'aide de cinquième génération

N° 3 N° 4

Thierry Latreille, AFD - January 2005.

Jean-David Naudet, AFD - Mai 2005.

Biens publics mondiaux et développement : De nouveaux arbitrages pour l’aide ?

Sarah Marniesse, AFD - Septembre 2005.

Agir en faveur des acteurs et des sociétés fragiles. Pour une vision renouvelée des enjeux de l’aide

au développement dans la prévention et la gestion des crises

Beyond the Fragile State: Taking Action to Assist Fragile Actors and Societies N° 5 N° 6 N° 7 N° 8

Jean-Marc Châtaigner et François Gaulme, AFD - Septembre 2005.

La filière riz au Mali : compétitivité et perspectives de marché

Pierre Baris, Jean Zaslavsky, Serge Perrin - Septembre 2005.

Turquie : Risque systémique bancaire et vulnérabilités macro-financières

François-Xavier Bellocq et Vincent Caupin, AFD - Octobre 2005.

La Tunisie et le marché euro-méditerranéen du tourisme

Jean-Raphaël Chaponnière, CEPN et AFD et Marc Lautier, CARE, Université de Rouen - Septembre 2005.

Le développement, une question de chance ? A propos du rapport sur le développement dans le monde 2006

« Equité et Développement »

Development, a Question of Opportunity? A Critique of the 2006 World Development Report: Equity and Development

Jean-Pierre Cling, Denis Cogneau, Jacques Loup, Jean-David Naudet, Mireille Razafindrakoto, François Roubaud, N° 9 N° 10 N° 11 N° 12 N° 13

DIAL - Septembre 2005.

Aid Selectivity According to Augmented Criteria

Jacky Amprou, AFD, Patrick Guillaumont, Sylviane Guillaumont Jeanneney, CERDI - November 2005.

Le Cambodge rural face à la pauvreté : contribution à la réflexion sur les dynamiques agraires et le changement

social

Julien Calas, AFD Phnom-Penh - Janvier 2006.

Vietnam : les vulnérabilités macro-financières associées au processus d’émergence.

Vietnam: Macro-Financial Vulnerabilities Associated with the Emergence Process

François-Xavier Bellocq et Jean-Raphaël Chaponnière, AFD - Janvier 2006.

Chine : la croissance et ses déséquilibres

François-Xavier Bellocq et Jean-Raphaël Chaponnière, AFD - Janvier 2006.

Legs colonial et gouvernance contemporaine (Note de synthèse)

Jean-François Bayart, Romain Bertrand, Thornike Gordadze, Béatrice Hibou et Françoise Mengin, FASOPO

(Fonds d'analyse des sociétés politiques) - Mars 2006.

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N° 14

Apprendre pour vivre et travailler : contribution du GEFOP au Rapport sur le développement dans le monde 2007 de la Banque mondiale

Learning for Life and Work : GEFOP Contibution to the World Development Report 2007 N° 15 N° 16 N° 17 N° 18 N° 19 N° 20

Réseau GEFOP (Synthèse rédigée par R. Walther) - Mars 2006.

La formation professionnelle en secteur informel (Note de problématique)

Vocational Training in the Informal Sector - Issue Paper Richard Walther, consultant ITG - Mars 2006.

La formation professionnelle en secteur informel - Rapport sur l’enquête terrain au Maroc

Vocational Training in the Informal Sector - Report on the Morocco Field Survey

Richard Walther, consultant ITG - Juin 2006.

La formation professionnelle en secteur informel - Rapport sur l’enquête terrain au Cameroun

Vocational Training in the Informal Sector - Report on the Cameroon Field Survey

Richard Walther, consultant ITG, avec le concours d’Ewa Filipiak et de Christine Uhder, AFD - Juillet 2006.

Rapport sur le risque-pays du Maroc

Jérôme Sgard, Cepii et Université de Paris-Dauphine - Juin 2006.

La formation professionnelle en secteur informel - Rapport sur l’enquête terrain au Bénin

Vocational Training in the Informal Sector - Report on the Benin Field Survey

Richard Walther, consultant ITG, avec le concours d’Ewa Filipiak et de Christine Uhder - Juillet 2006.

Institutions, développement et pauvreté Institutions, Development and Poverty

Alice Sindzingre, CNRS, EconomiX, Université Paris X-Nanterre ; School of Oriental and African Studies (SOAS), N° 21 N° 22

Université de Londres - Juillet 2006.

La formation professionnelle en secteur informel - Rapport sur l’enquête terrain au Sénégal

Vocational Training in the Informal Sector - Report on the Senegal Field Survey

Richard Walther, consultant ITG, avec le concours d’Ewa Filipiak et de Christine Uhder - Juillet 2006.

Les fondations philanthropiques américaines, acteurs émergents de la mondialisation et piliers du dialogue trans-

atlantique.

American Philantropic Foundations: Emerging Actors of Globalization and Pillars of the Transatlantic Dialogue

N° 23 N° 24 N° 25 N° 26

Benoît Chervalier, German Marshall Fund of the United States, et Joseph Zimet, AFD - Juillet 2006.

L'AFD et ses partenaires : La dimension culturelle

Philippe d'Iribarne, CEREB - CNRS - Août 2006.

Secteur de l'eau au Sénégal - Un partenariat équilibré entre acteurs publics et privés pour servir les plus

démunis ?

Aymeric Blanc, département de la Recherche, AFD, et Cédric Ghesquières, consultant junior, AFD - Août 2006.

Décentralisation et politique de l'eau gratuite en Afrique du Sud: Quelle place pour le secteur privé ?

Decentralization and free water policy in South Africa: where does the private sector come in?

Aymeric Blanc, département de la Recherche, AFD, et Cédric Ghesquières, consultant junior, AFD - Août 2006.

L’intégration des programmes d’aide alimentaire aux politiques de développement du Niger : le cas de la crise alimentaire 2004-2005.

The Integration of Food Aid Programmes in Niger's Development Policies: the 2004-2005 Food Crisis

N° 27

Dorothée Chen et Nicolas Meisel, département de la Recherche, AFD, en partenariat avec DIAL - Septembre 2006.

Proposition d’organisation des outils de gestion du risque de marché au bénéfice des filières cotonnières africaines Jean Cordier, Agrocampus Rennes - Septembre 2006.

© AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 56

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N° 28

Les privatisations en zone franc – synthèse des travaux du groupe de travail MINEFI/AFD

N° 29

Out of the financing trap? Financing post-conflict countries and LICUSs

N° 30

La formation professionnelle en secteur informel - Rapport sur l'enquête terrain en Afrique du Sud

Aymeric Blanc, département de la Recherche, AFD - Septembre 2006.

Marc Raffinot, Université-Dauphine, et Christine Rosellini, DIAL, Paris - October 2006.

Vocational Training in the Informal Sector - Report on the South Africa Field Survey

Richard Walther, ITG Consultant, Ewa Filipiak, département de la Recherche, AFD, et Christine Uhder, AFD -

N° 31 N° 32 N° 33

Octobre 2006.

The Brain Drain: What Do We Know?

Frédéric Docquier, FNRS and IRES, Université Catholique de Louvain and World Bank - Khalid Sekkat, DULBEA, Université Libre de Bruxelles - October 2006.

Les délocalisations françaises vers la Turquie

Julien Gourdon, CERDI, Université d'Auvergne - Décembre 2006.

Capital naturel et développement durable en Afrique

Natural Capital and Sustainable Development in Africa

Pierre-Noël Giraud, CERNA, Centre de recherche en économie industrielle, Ecole nationale supérieure des Mines

N° 34 N° 35 N° 36 N° 37 N° 38 N° 39 N° 40 N° 41 N° 42

de Paris, Denis Loyer, AFD - Décembre 2006.

La formation professionnelle en secteur informel Rapport sur l’enquête terrain en Ethiopie

Vocational Training in the Informal Sector - Report on the Ethiopia Field Survey Richard Walther, Consultant ITG - Novembre 2006.

La formation professionnelle en secteur informel Rapport sur l’enquête terrain en Angola

Vocational Training in the Informal Sector - Report on the Angola Field Survey

Richard Walther, Consultant ITG - Novembre 2006.

Les accords de partenariat économique : des accompagnements nécessaires

Economic Partnerships Agreements: Accompanying Measures Are Needed

Anna Lipchitz, département de la Recherche, AFD - Janvier 2007.

Energie du Mali, ou les paradoxes d’un « échec retentissant »

Béatrice Hibou, CNRS - CERI, Olivier Vallée, Consultant, AFD - Janvier 2007.

Public Private Partnerships in Water and Electricity in Africa

Emmanuelle Auriol, ARQADE and IDEI Toulouse Sciences Economiques, Aymeric Blanc, département de la

Recherche, AFD - January 2007.

Economic Partnership Agreements and Regional Trade Flow Dynamics: The ECOWAS Case

Benoît Faivre Dupaigre, Vanessa Alby-Flores, Borgui Yerima, Ann Vourc’h, Anna Lipchitz, Philippe Chedanne - March 2007.

La Régie des eaux de Phnom Penh : un modèle de gestion publique efficace

Aymeric Blanc et Alain Riès, département de la Recherche, AFD - Mai 2007.

Répartition des gains dans les partenariats public-privé : effets comparés des modalités d’assiette d’une redevance

de concession

Olivier Ratheaux, AFD - Juin 2007.

Potential Financial Frameworks for a Sustainable UNEO

Helle Husum, COWI, Erik Brander, COWI, Suzanne A.K. Steensen, COWI, et Emmanuelle Lachaussée, AFD - June

2007

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N° 43

La concession des aéroports de Madagascar : une privatisation en trompe-l’œil ?

N° 44

La concession du chemin de fer du Cameroun : les paradoxes d’une réussite impopulaire

N° 45 N° 46 N° 47 N° 48 N° 49 N° 50 N° 51 N° 52 N° 53 N° 54 N° 55 N° 56 N° 57

Aymeric Blanc, département de la Recherche, AFD, et Olivier Gouirand, AFD - Août 2007.

Aymeric Blanc, département de la Recherche, AFD, et Olivier Gouirand, AFD - Août 2007.

Analyse rétrospective de la crise alimentaire au Niger en 2005

Jean-Pierre Olivier de Sardan, LASDEL, avec la participation de M. Ali Bako, E. Guillermet, O. Hamani, Y. Issa, M. Koné et M. Moha - Septembre 2007.

Une nouvelle base de données institutionnelles : « Profils Institutionnels 2006 »

A new institutional database: “Institutional Profiles 2006”

Nicolas Meisel, département de la Recherche, AFD et Jacques Ould Aoudia, DGTPE - Septembre 2007

Governance of Renewable Natural Resources: Concepts, Methods and Tools

Sheila Wertz-Kanounnikoff, Institut du développement durable et des relations internationales (Iddri) et

Dominique Rojat, AFD - September 2007.

La crise de la filière coton : conséquences économiques et financières au Burkina Faso

François Xavier Bellocq et Arthur Silve, département de la Recherche, AFD - Septembre 2007.

Youth and labour market in Africa (DIAL)

Jean-Pierre Cling, Flore Gubert, Christophe J. Nordman, Anne-Sophie, DIAL - October 2007.

Culture and development: a review of literature. The continuing tension between modern standards and local

contexts

Hèla Yousfi, Researcher at “Gestion et société”, CNRS, Paris - November 2007.

Transferts et déséquilibres macroéconomiques des économies ultramarines Philippe Jean-Pierre, université de la Réunion - Novembre 2007.

Eloignement, insularité et compétitivité dans les petites économies d’outre-mer

Bernard Poirine, maitre de conférences d’économie à l’université de la Polynésie française - Novembre 2007.

Pourquoi s’ouvrir ? Contraintes et perspectives pour les économies ultramarines

Jean-Michel Salmon, maitre de conférences, CEREGMIA-faculté de droit et d’économie de la Martinique, université des

Antilles et de la Guyane et consultant indépendant à STRADEVCO - Novembre 2007.

Regional Trade Agreements and Developing Countries: The Case of the Independent Pacific Island States Robert Scollay - November 2007.

Corporate Social Responsibility in Turkey: Overview and Perspectives

Naïg Cozannet, Agence Française de Développement, Helge Rieper, Frankfurt School of Management and Finance Yekbun Gurgoz, Agence Française de Développement - December 2007.

Allocation geographique de l’APD francaise : comparaison entre la sélectivité de l’APD française totale et celle de

l’Agence Française de Développement

Jacky Amprou, AFD, Carl Bernadac, AFD, Pascaline Magnes, ministère des Affaires étrangères - Novembre 2007.

L’aide au commerce dans les pays en développement : des articulations complexes pour une efficacité réelle Aid for Trade in Developing Countries: Complex Linkages for Real Effectiveness

Marilyne Huchet-Bourdon, maître de conférences en économie, Agrocampus Rennes, Anna Lipchitz, économiste,

N° 58

département de la Recherche, AFD, Audrey Rousson, consultante, AFD - Janvier 2008.

La « bonne gouvernance » est-elle une bonne stratégie de développement ?

Is “Good Governance” a Good Development Strategy?

Nicolas Meisel, département de la Recherche, AFD, Jacques Ould Aoudia, Direction générale du Trésor et de la

politique, économique du ministère de l’Economie, des Finances et de l’Emploi - Janvier 2008. © AFD Working paper no. 87 • Local taxation: an economy-based guide • November 2009 58

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N° 59 N° 60 N° 61 N° 62 N° 63 N° 64 N° 65 N° 66 N° 67 N° 68 N° 69 N° 70 N° 71 N° 72 N° 73 N° 74 N° 75

Prospective et enjeux énergétiques mondiaux - Un nouveau paradigme

World Energy Prospects and Stakes - A New Paradigm

Bernard Laponche, consultant - Janvier 2008.

Cycle du crédit et vulnérabilités financières : évolutions récentes dans certains pays émergents Matteo Mogliani, Ecole d’économie de Paris - Mars 2008.

L’industrie égyptienne depuis le début des années 1970 : histoire d’un développement contrarié

Egyptian Industry since the Early 1970s: A History of Thwarted Development

Hélène Djoufelkit-Cottenet, département de la Recherche, AFD - Mars 2008.

Africa and its Demographic Challenges: an Uncertain Future

Patrice Vimard, Institut de recherche pour le développement (IRD) - April 2008.

Comparative Fiscal Response Effects of Debt Relief: an Application to African HIPCs

Danny Cassimon, Bjorn Van Campenhout, Institute of Development Policy and Management (IDPM), University of

Antwerp, Belgium - March 2008.

Rente, développement du secteur productif et croissance en Algérie

Hélène Djoufelkit, économiste, Agence Française de Développement - Juin 2008.

Préférences commerciales et règles d’origine : conséquences des APE pour l’Afrique de l’Ouest et centrale

Olivier Cadot, université de Lausanne, CEPR, CERDI et CEPREMAP, Calvin Djiofack, CERDI, Jaime de Melo, université de Genève, CEPR et CERDI - Juin 2008.

The investment climate in Egypt: Institutions or Relationships as Conditions for Sustainable Reform?

Hèla Yousfi , Gestion et société, LISE, CNRS, John Humphrey, Institute of Development Studies, Brighton UK - June 2008.

Privatisation and Regulatory Reform in the Middle East and North Africa (MEDA) Area - Telecom Case Study Mihoub Mezouaghi, AFD - June 2008.

Réduire le méthane : l’autre défi du changement climatique

Benjamin Dessus, Bernard Laponche, association Global chance - Juillet 2008.

La présence chinoise en Afrique de l’Ouest : le cas du Mali et du Bénin

Mathilde Dupré et Weijing Shi, Institut d’études politiques de Paris - Août 2008.

Pour une approche sociétale et politique du développement

Xavier Ricard Lanata, ethnologue, directeur des partenariats internationaux du Comité catholique contre la faim et pour le développement, CCFD - Septembre 2008.

Politique publique, stratégie des acteurs et qualité du tourisme sud-méditerranéen : apports de l’économie industrielle

Abdelhakim Hammoudi, INRA et université Paris 2 - Septembre 2008

L’Indonésie dix ans après la crise

François-Xavier Bellocq, département de la Recherche, AFD, Jean-Raphaël Chaponnière, département Asie, AFD Septembre 2008

External Debt in Low-Income Countries: Taking Stock and New Perspectives

Hélène Djoufelkit-Cottenet et Cécile Valadier département de la Recherche, AFD - October 2008.

Balances migratoires. Concept, hypothèses et discussions

Thomas Mélonio, département de la Recherche, AFD - October 2008.

Viabilité de la dette des pays à faible revenu dans une perspective de reendettement post-allégements de dette

Hélène Djoufelkit-Cottenet, département de la Recherche, AFD, Marc Raffinot, Université Paris Dauphine, LEDa, DIAL - Décembre 2008.

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N° 76 N° 77 N° 78

Market Access and Specialization in Cash Crops: Vietnam’s Expected Gains from WTO Accession

Barbara Coello, Paris School of Economics at the Laboratoire d’économie appliquée - Institut national de recherche

agronomique (LEA -INRA) - December 2008.

The Banking System of Vietnam after the Accession to WTO: Transition and its Challenges

François-Xavier Bellocq et Arthur Silve, département de la Recherche, AFD - December 2008.

« L’itinéraire professionnel du jeune africain » Les résultats d’une enquête auprès de jeunes leaders africains sur les « dispositifs de formation professionnelle post-primaire »

Richard Walther, consultant ITG, Marie Tamoifo, porte-parole de la jeunesse africaine et de la diaspora

N° 79 N° 80

Contact : Nicolas Lejosne, département de la Recherche, AFD - janvier 2009.

Le ciblage des politiques de lutte contre la pauvreté : quel bilan des expériences dans les pays en développement ?

Emmanuelle Lavallée, Anne Olivier, Laure Pasquier-Doumer, Anne-Sophie Robilliard, DIAL - février 2009.

Les nouveaux dispositifs de formation professionnelle post-primaire. Les résultats d’une enquête terrain au Cameroun, Mali et Maroc

Richard Walther, Consultant ITG

Contact : Nicolas Lejosne, département de la Recherche, AFD - mars 2009.

N° 81

Economic Integration and Investment Incentives in Regulated Industries

N° 82

Capital naturel et développement durable en Nouvelle-Calédonie - Etude 1. Mesures de la « richesse totale »

Emmanuelle Auriol, Toulouse School of Economics, Sara Biancini, Université de Cergy-Pontoise, THEMA,

Comments by : Yannick Perez and Vincent Rious - April 2009.

et soutenabilité du développement de la Nouvelle-Calédonie

Clément Brelaud, Cécile Couharde, Vincent Géronimi, Elodie Maître d’Hôtel, Katia Radja, Patrick Schembri,

Armand Taranco, université de Versailles - Saint-Quentin-en-Yvelines, GEMDEV N° 83 N° 84 N° 85 N° 86

Contact : Valérie Reboud, département de la Recherche, AFD - juin 2009.

The Global Discourse on “Participation” and its Emergence in Biodiversity Protection Olivier Charnoz - July 2009.

Community Participation in Biodiversity Protection: an Enhanced Analytical Framework for Practitioners

Olivier Charnoz - August 2009.

Les Petits opérateurs privés de la distribution d’eau à Maputo : d’un problème à une solution ?

Aymeric Blanc, Jérémie Cavé, LATTS, Emmanuel Chaponnière, Hydroconseil Contact : Aymeric Blanc, département de la recherche, AFD - août 2009.

Les transports face aux défis de l’énergie et du climat

Benjamin Dessus, Global Chance.

Contact : Nils Devernois, département de la Recherche, AFD - septembre 2009.

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