The issues of distribution of tax powers between the government and public administration levels

Levan Jgarkava

Possible variants of distribution of tax powers between the levels of government and budgets are considered in the article from the viewpoint of their interrelations.

Three variants of vesting tax powers to sub national government bodies are known.
Sub national government bodies can be vested all powers on regulation of the collected taxes on the territories that are under their jurisdiction. At the same time it is determined that the national government should delegate a part of taxes to the supreme level of the budgetary system for the fulfillment of the expenditure obligations.
Since the second variant may decrease the effectiveness of tax distribution between the territories and also inhibit fiscal stabilization, it is considered to be more or less effective method of stabilization of the state resources for it can create non-adequate stimuli for the local government bodies from the viewpoint of financing of the national expenditure obligations.
The second variant of distribution of tax incomes contradicts the first one and implies delegation of all tax powers to the central government, further handing over of means to the subordinate government levels in the form of grants and transfers as well as setting of standards for separate tax transfers for the budgets of the lower levels of government. The main fault of this system is absolute absence of relations between the level of government and the level of decision-making on the expenditures on a territory on which taxes are collected, which is an important precondition for creation of an effective system of relations between the budgets.
The third, intermediate variant of distribution of income powers implies transferring of a part of tax powers to the local or regional government bodies, and only in case of necessity the compensation of the lack of funds in the local budget will take place by means of handing over of a definite share of regulating and attached taxes or transfers. The key issue of implementation of a similar scheme of income distribution is a selection of those taxes that are delegated to the local or regional bodies (local or regional taxes), as well as national taxes whose definite share of payments is attached to the local or regional budgets in the form of regulating taxes. In case of delegation of taxation powers to the lower levels of government, when an opportunity of linking the volume of the tax burden to the implementation of the assumed expenditures is provided, local government bodies are guided by the “expenditure-profit” principle, which leads to increasing of economic effectiveness.
For several levels of state government a sudden vesting of tax collecting powers creates a problem of optimal distribution of powers between these levels.