Tax Assignment

Between Local and

National Government

JAMES GICHUKI

Introduction

Tax assignment refers to the division of revenue

sources among national and subnational

governments.
Once expenditure and regulatory assignments have
been agreed on, tax assignment and the design of
transfers become critical elements in matching
expenditure needs with revenue means at various
orders of government.
Such arrangements prevent overdependence by
subnational and local governments on
intergovernmental transfers, which can otherwise
distort local spending priorities.
Efficiency and equity arguments have to be tempered
by administrative considerations, though exact

Principles of Tax Assignment

Efficiency of the internal common market

Efficiency will be achieved when the internal common market between
subnational governments operates such that all resources (labor, capital,
goods and services) are free to move from one region to another without
impediments or distortions imposed by policy.
Uncoordinated setting of taxes is likely to lead to distortions in markets for
resources which are mobile across local governments, especially capital and
tradeable goods.
Wasteful competition by lowering taxes are avoided by leaving mobile
factors at national level.
National Equity
Tax-transfer system is one of the main instruments for achieving
redistributive equity.
National government is the only level that can ensure that residents in
different regions are treated equitably.
Given the mobility of labor and capital across subnational jurisdictions, they
may engage in perverse redistributive policies using both taxes and
transfers to attract high-income persons and repel low-income ones.

Principles cont.

The administrative feasibility (lowering compliance

and administration costs);
Suggests that taxes should be assigned to the jurisdiction
with the best ability to monitor relevant assessments.
This criterion minimizes administrative costs as well as
the potential for tax evasion.
For example, property, land, and betterment taxes are
good candidates for local assignment because local
governments are in a good position to assess the market
values of such assets.
The fiscal need, or revenue adequacy,
To ensure accountability, the ability to raise revenues
from own sources should be matched as closely as
possible to expenditure needs.

Assignment by Type of
Tax

Value added tax

This tax is best collected at the national level.
Macroeconomic stabilization tax which is sensitive to economic
and business fluctuations.
By having it taxed at the national level, then uniform rates will
be enforced and help the government to take care of
aggregate demand.
Local governments are unlikely to operate in keeping with the
stabilization function.
Cross border shopping where residents of high tax jurisdictions
have an incentive to shop in neighbouring low tax jurisdictions
to reduce their tax burdens.
The administrative complexities of operating a system of
taxing and crediting on all cross border transactions would be
very high and would likely constitute a significant distortion.

Assignment cont..

Corporate income tax

This tax is best handled at the national level.
It is better levied at the same level as the personal tax so that it can be
integrated easily.
Most companies may have branches across the country so at national level
administration becomes easy.
The international nature of multinationals also calls for taxes to be levied at
this level so that adherence to international tax law is observed.
it affects mobile factor of production meaning that companies maybe
unsettled by changes in tax rates by trying to move to places where taxes
are lower. At the national level uniform taxes will offer no incentives for
movement.
Decentralising this form of tax results in jeopardising the efficient
functioning of the capital markets and giving rise to possibility of wasteful
tax competition to attract capital at the expense of other jurisdictions.
Decentralisation would also distort the geographical allocation of resources
The other challenge is tax administration in a multi jurisdiction setting is
complex and costly which increases compliance cost to the taxpayers

Assignment cont..

Personal income taxes

This is a tax that is considered suitable for macroeconomic
stabilization and therefore should be left at the national government.

This is because its important for redistribution. According to

Broadway et al, (1994) assignment of personal income taxes to the
local level runs the risk of national equity objectives being violated
through different degrees of progressivity across local governments,
and of beggar-thy-neighbor local government policies competing
away redistribution.
Capital income is typically a component of these taxes, there is a
possibility of capital markets being distorted.
Another challenge would be establishing place of residence may be
difficult for persons who move during the tax year. It becomes
difficult to assign proportions of a tax base to each local government
according to the share of a tax year spent in the local government.

Assignment cont..

Property taxes
Property taxes are best administered at the local level.
Properties are immobile and as a result cannot shift whenever
taxes increase.
It is also very clear which local government is entitled to the tax
and the tax is predictable and stable.
It is costly and difficult to administer especially in determining the
tax base since there is a lot of discretion in valuation at national
level.
Capital gains tax
This is an income tax that is best handled at national level.
This is for purpose of ease in tracking alongside the corporation
tax thus minimizing the costs of administration.
The cross subnational level investments would bring a challenge
for subnational level governments to levy taxes.

Assignment cont..

Taxes on natural resources

Taxes on natural resources should be left at the national level due to
efficiency and equity criteria.

Resources tend often to be distributed very unevenly across local

jurisdictions in a given country.
Decentralizing resource taxes to the local governments would result in
significant differences in tax capacities, thus creating fiscal inefficiencies
and inequities.
Some resource taxes, such as royalties and fees and severance taxes on
production and/or output, are designed to cover costs of local service
provision and could be assigned to local governments.
Taxes on chicken
These are best handled at the local level.
This kind of tax would be an expensive one to administer for the national
government and also easy to evade at that level.
This tax is also best done at lower level depending on whether policy
wishes to minimize production or incentivize largescale production only.

Assignment cont..

Taxes on livestock
Livestock taxes are suited for local governments.
This is since livestock taxes would be expensive to
administer at a national level.
It would also depend on policy needed to be passed down.
The tax in this case would be readily accepted at local
level than would be if it was passed form national level.
Land tax
The taxes collected from land include stamp duty on sale
of land and land rates.
Land like property taxes are best taxed at local level.
This is because it would be easier to administer as owners
would be easy to identify thus minimizing evasion.