The methodology for analyzing the impacts of fiscal architecture on governments is based on the relationship between the (above) components and government revenue and expenditures. Thus, the expenditure side of the budget will largely be driven by “needs” as objectively measured, which can be done by estimating a systematic relationship between changes in the population with re-spect to considerations such as size and composition and the changing relative cost of production of service delivery (growing public sector relative to private production is often a great concern for subnational governments where the delivery of services is often a labor-intensive process not easily amenable to cost containment using technological changes).2
Consider, for example, that Kosovo has a particularly young population distribution, with fully a third of the total population of primary school age (0–14 years), and another 61% in the 15–64 year cohort (UNFPA 2003, Table 2.1). For policymakers, this means giving short- as well as medi-um-term expenditure planning to considerations of not only the operating costs of activities such as public recreation and a teacher core, but also to planning for capital improvements for schools (general as well as vocational), and growth-enabling physical infrastructure. Moreover, given such a young population profile, policymakers are forewarned to now carefully plan a pension system that will be solvent over time.
This youth dominance does not necessarily mean that services traditionally associated with the elderly can be ignored, especially in some municipalities outside of Prishtina where the population may be relatively elderly and in need of health clinics, hospitals and social services. Similarly, once the Status Talks are completed, Kosovo may experience an influx of new residents (or conversely, an emigration). If there is an in-migration, then, for example, the issue of housing may become increasingly important to the budget committees.
Revenues
A similar logic applies to the “fiscal architecture” that frames the revenue side of the budget equa-tion.3 In this case, the challenge is not only to find the right fit between the general nature of the tax base and external reality, but also between the type of tax and the tax base—to identify the tax that best captures the tax base. A broad measure of taxable income makes sense for an employed labor force. Real property taxes make sense as a sustainable revenue source for land and capital intensive economies. Agricultural income and land taxes are obviously attractive in farm intensive
2 The relationship between changes in public expenditures and changes in demographic factors can be expressed as follows: ΔEXPi
= ΔCPOPi * (PXPSi) + ΔPXPSi * (CPOPi), where EXPi is the total expenditure on the ith spending category, CPOPi is the client population of the ith spending category, and PXPSi is the production expense of the ith spending category. In this expression, the left hand side is the change in expenditure for a particular spending category, EXPi, and the right hand side of the equation contains the components of the change in expenditures.
3 An expression for the relationship between changes in public revenues and changes in demographic and economic factors may also be expressed as follows: ΔRevi = ΔTXBASEi * (TXRATEi) + ΔTXRATEi * (TXBASEi) where, Revi is the revenue from source i, TXBASEi is the base for tax source i, and TXRATEi is the tax rate for source i. This equation assumes a given population to pay the tax. Obviously, if the number of taxpayers increases or decreases, this will directly affect the level of collections. For example, if there is a large increase in the labor force participation, we should expect to see an increase in income tax collections. The equation also as-sumes a given (constant) level of enforcement effort.
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areas. Business receipts and consumption taxes such as those on retail sales become increasingly important for communities that experience a shift to services. Excise taxes and doing-business permit fees can work in a sector that is characterized by hard-to-tax small businesses, the self-em-ployed and underground activities. Natural resource taxes can be potentially productive for some countries, but, if they are to be so, one must be ready for a lot of clear-thinking on how to set up a tax system that takes into account the fiscal interests of both a “central” government and the local areas in which mineral mining occurs (Bahl and Tumennasan 2002 ).4
The table below briefly illustrates the way of thinking that fiscal architecture analysis requires.
Characteristics of fiscal architecture appear in the first column; examples of changes in these areas appear in the second column; and the implications for expenditure and tax policy follow in the next two columns. In reviewing this table, it is important to keep in mind the intergovernmental nature of both the spending and tax sides of the budget. A fiscally sustainable Kosovo, whether province or nation, will require the reinventing of a new fiscal partnership between central and subnational (e.g., local) governments.
4 Kosovo lists 132 types of extractive natural resources, each of which is subject to some royalty tax or fee.
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Table 1. Illustrations of Local Fiscal Architecture and Likely Implications for Spending and Tax Policy
External Reality Trend /Condition Spending Implications Tax Implications Demographic:
Age distribu-tion and family composition
Workforce: disproportion-ately elderly or young?
Youth: schools, infra-structure of growth, police; for the 15–64 cohorts, higher educa-tion; and as society ages, health and hos-pitals.
For the “end points” of youth and elderly, charges on consumption (fees, charges). As employment grows for the workforce age group, taxes on income.
Economic:
Structure of output mix
Home/self-employment
Regulatory systems that enable such work;
improvements in broad-band connec-tivity.
Informal economy that calls for non-tax rev-enues (license fees) and consumption and excise taxation; income taxes not likely to be feasible.
Dominated by crop agriculture, both large and small producers’ mineral mining (at present, 55%
of the Kosovo population is agricultural/rural and 45% urban).
(i) Transportation; (ii) environmental control;
(iii) need to develop off-site infrastructure for access to markets.
(i) Suggests a focus on land value (or some proxy) and agricultural income tax; agricultural taxes may complement rather than be integrated with urban property taxation (e.g., use versus highest and best assessment); (ii) environ-mental damage fees, inter-governmental sharing of a tax base (e.g., royalties).
Small business Technical support (e.g., agricultural research services).
Market excise tax on production and/or sales, plus “doing business” fees;
presumptive taxation.
Demographic:
Spatial distribu-tion of popula-tion
Rural dominance Access to educational facilities
Broad-based land taxation often politically difficult.
Per house (communal) tax an option.
Urban dominance
Increased demands for most infrastructures services—look for economies of scale and use of special (rather than only gen-eral purpose) govern-ments.
At first, real estate (com-mercial & residential) taxa-tion feasible. Perhaps, as a communal levy, but then with progress to modern concept of real estate tax.
Low-rate business receipt taxes and market fees/
taxes are enforceable.
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Table 1. Illustrations of Local Fiscal Architecture (continued)
External Reality Trend/Condition Spending Implications Tax Implications
Institutional:
Progress in scope and qual-ity of social services.
Increase participation in education; distribution of clean water (if not piped to residents and business-es, then, at least, delivered to locations convenient to users).
Water supply (central and regional) and distribution (local).
Enabling environment for economic develop-ment spending.
Likely to be a measur-able willingness to pay for service improvements;
demonstrating the service quid pro quo is essential.
Up-front external finan-cial, technical, and capac-ity assistance can play an important role.
Institutional:
State of public records; data.
Many localities have no property records; or they are very old (census).
In some countries, land ownership is communal and/or nomadic.
General government.
May require presumptive taxation (which must be transparent); nomadic fee charging possible, but po-litically difficult; taxpayer identification can be a hurdle.
Institutional:
Communications infrastructure.
Transportation modes;
availability of postal/mail services; IT usage by the public sector.
Highways (regional, national) and roads and streets (local).
Even if assessment pos-sible, how to collect, audit and appeal if system is poorly developed?
Cultural: Ethnic mix; Views on basics such as a census, land tenure, what is a
“tax.”
In some societies a census taker may be either sus-pect and/or a family will not allow all members to participate; also concepts of land ownership will vary (which, in turn, un-dermines getting a taxable base).
Policing, general government to ensure equal access to servic-es; taxpayer services, mechanisms for citizen voice and participation in budget decisions.
For census, sampling and estimating techniques become even more im-portant. The economic vagaries may be easier to address; for example, that of tax-related issues as to what constitutes “rights in land” may be sometimes addressed by distinguish-ing between land rights, ownership and use.
Source: Wallace 2003; Ebel and Taliercio 2006; Vaillancourt 2006.
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References
Bahl, Roy and Bayar Tumennasan. 2003. How Should Revenues From Natural Resources Be Shared in Indonesia? A conference sponsored by the International Studies Program, Andrew Young School of Policy Studies, Georgia State University, Atlanta, Georgia, USA. Available at http//aysps.gsu.edu.
Ebel, Robert D. and Robert Taliercio. 2005. “Subnational Tax Policy and Administration in Devel-oping Economies.” Tax Notes International, April.
United Nations Population Fund (UNFPA). 2003. Kosovo Population Statistics. Survey of Demo-graphic, Social and Reproduction System in Kosovo.
Vaillancourt, Francois. 2006. Fiscal Decentralization in Kosovo, a report prepared for the United Na-tions Development Programme, July. Pristina. This report is summarized in the Introduction to this Briefing Book.
Wallace, Sally. 2003. Fiscal Architecture: A Framework for Analysis of Public Expenditure Needs and Rev-enue Capacity. Paper prepared for the World Bank Thematic Group on Taxation and Tax Policy, April. Andrew Young School of Public Policy, Georgia State University, Atlanta, Georgia (USA).
http//aysps.gsu.edu