Taxes

The free-market view is in general in favour of decentralization. By and large, the rationale behind this claim is that decentralized taxation and spending imply greater accountability for politicians and public officials. In turn, greater accountability generates less corruption and better services to the community. The authors of this paper suggest that this claim needs to be taken with caution, since the quality of the local institutions significantly affects the outcome of fiscal decentralization (spending performance).

According to the Tax Foundation, this year U.S. citizens will pay more than $4 trillion in total federal, state and local taxes. That sum “is $152 billion, or 3.9%, more than they will spend on housing, food, and clothing combined. The data shows that from 1929 to 1980 tax liabilities grew from $10 billion to $751 billion. But expenditures on housing, food, and clothing still was more than that final sum, growing from $41.6 billion to $775.7 billion.

The UK Peers have attacked plans by the European Commission for a Europe-wide financial transaction tax, warning that if introduced, the UK could account for 71% of the revenue it would raise. It is unclear, they said, why the financial sector should be targeted, and the FTT proposal’s reversal of the trend towards horizontal measures is rendering it inappropriate as an EU revenue source.

Executive Summary

The main purpose of this paper is to investigate whether, and to which extent, the rules introduced by central governments effectively restrain the spending behaviour of the decentralized authorities. In this paper, the authors provide an innovative comparative analysis by considering two countries that share the same degree of economic development and many cultural traits – France and Italy. Yet, these two countries differ in one crucial respect. France has a tradition of strong centralization, bureaucratic discipline and detailed technocratic control on the periphery (the regions). By contrast, Italy is known to follow a more flexible approach, which allows for some negotiation between the central and the peripheral authorities and feeds expectations for assistance and bail-outs, should the regions engage in excessive spending and violate the budgetary rules set by the centre.

This is the expected revenue from the financial transaction tax promoted by the EU. The proposal is expected to come into effect from 1st January 2014 and applies to the transactions carried out by financial institutions (banks, investment firms, insurance undertakings, collective investment undertakings, etc.) acting as party to a transaction, either for their own account or for the account of other persons. Most financial instruments (securities, bonds, etc.) and derivatives thereof (such as options or swaps) will be covered by the tax.

In recent years, the Baltic States have been showcased as an austerity success story. While the whole world has seen countries such as Greece, Spain and Portugal struggling to reduce their public spending, Lithuania has been hailed as an austerity example. Lithuanian success in public spending cuts has been widely acknowledged; yet simultaneous tax increases and their harmful effects have received less attention. Since the end of 2011, however, the country once again found itself embroiled in a budget crisis and is now moving down the dangerous road of tax hikes.

If adopted as a new own resource of the EU budget the financial transaction tax (FTT) will significantly reduce the contributions of member states to the EU budget, according to estimates presented yesterday by the European Commission. Member States’ contributions would be slashed by €54bn in 2020.The Commission proposes that two thirds of the revenues of the FTT go to the EU budget, reducing by the same amounts Member States’ contributions based on their GNI, with the remaining one third being retained by Member States.

Last March 30, the Spanish Government announced its most important measures to reduce the fiscal deficit for 2012. These actions have been based on reducing public spending and, again, increasing taxes. “Again” because on December 30, 2011, the conservative new Government already raised the Personal Income Tax, making Spain one of Europe’s most heavily taxed countries.

Canada was recently elected by Forbes magazine number one country in the world to do business. Among other things, its corporate tax rate (federal and provincial rates combined) is at 25%, the lowest among G7 countries. But some provinces in Canada still have to be convinced that this is a move in the right direction. May be the fact that revenues from corporate taxes remain high, and even higher than it was before the cuts, will help them.

The Rajoy administration in Spain announced two months ago one of the largest tax increases in recent Spanish history. It aims to raise 6 billion euros ($7.9 billion) — along with a spending cut of nearly 9 billion euros ($11.8 billion). The measure mainly consists of a so-called solidarity surtax to come on top of tax rates on income and capital gains; it also includes an increase in real estate taxes.