PA454 Budgeting and Taxation
October 10, 2000
Tadahiro
Fujikawa
Does the federal system work for all levels of government?
Independent
relationship
All levels of government in the federal system are
constitutionally defined. Each level of government has substantial autonomous
decision-making authority prescribed in the Constitution. The responsibilities
for public service delivery and the authorities are differently assigned to
each level of government. Under this independent relationship among the
governments, each level of government executes discretion in budgetary
processes that determine matters of revenues and expenditures concerning each
jurisdiction. Also, each government has different revenue resources and
purposes of spending. In terms of difference of tax structure, for example, the
federal government mainly applies flexible primary sources such as individual
income tax and corporation income tax; on the other hand, state and local
governments depend on relatively more inflexible sources such as the property
tax. In terms of differences of expenditure, federal government focuses on
broader national issues such as Social Security, Medicare, Medicaid, and
National Defense, while state and local governments emphasize more regional and
local policies and programs deeply related to each resident’s life.
The efficiency of governmental functions
is performed in the decentralized system. In this system, each jurisdiction’s
authority and resources to the public service are allocated to reflect the
benefits of its residents. According to the size of the jurisdiction, each
government fairly has the authority to decide its own level of public services based
on its individual public need. For example, services of fire, water supply,
police and ambulances are provided by local governments. Different optimal
scales of benefits, funding and service delivery are efficiently produced or
provided through the decentralized governmental functions, so that the economic
rationale of governmental activities is secured. Also, the externalities of
public services are reduced in the system because the system permits
governmental functions that are allocated to different levels consistent with
the extensiveness of the benefit or the impact of the provided services.
The federal system encourages political
participation of the constituents into each government by defining each
jurisdiction. This participation is an essential condition of fiscal progress
in all governments. It can lead to the appropriate use of public funds not only
because each government focuses on the balance of scales of the public
resources according to the size of jurisdiction, but also because voters can
participate in political negotiations within the government by sharing in
making and executing decisions.
Moreover, the system enlarges “public
choice” which is related to voter’s demand for services as well as the
government’s own strategies and programs. The increase of “public choice”
induces serious competition among and within governments because the various
different approaches, requests and values of decision-making are involved in
determining public choice. The efficiency with which the government pleases its
constituents will be improved by such competition; likewise efficient market
activities will be accomplished by commercial competition with greater choices.
“A large number of independently operating units…….. is likely to be more
responsive to consumer demands, and more efficient in satisfying them, than a
small number of units each with significant monopoly powers (Break, p15).”
In terms of independent relationship
that are constitutionally defined, governmental authorities are assigned equally
according to each jurisdiction’s size and fiscal capacity. The federal system
allows each government to have considerable freedom in designing its fiscal
policies. Therefore, even if differences among the authorities exist, it can be
rational. The assignment of governmental authorities is essential because it
does not only contribute to governmental efficiency, but also to secure
political participation for a successful fiscal program.
The federal system, however, includes financial
interdependent relations among and within each level of government as well as
independent relations. In the interdependent relationship, because budgetary
decision-making at one level of government depends on the decisions made at
other levels, there are various governmental interactions concerned with
service delivery and resource allocation. Sharing, overlapping and competing
authorities of levels of government are the groundwork of the system.
The fiscal capacity of governments to finance
their responsibilities depends on the individual’s income and wealth. Every
capacity of state and local government essentially differs because the incomes
and wealth of the residents are different. The fundamental distinction of
fiscal capacities among governments does not only causes differentiation of tax
rates among each level of government and the difference of service levels that
each jurisdiction provides, but also it stirs up fiscal disparities among and
within levels of government, which aggravate bias of services and lack of
necessary funding.
The existence of the fiscal disparities
provides a potential basis for intervention of higher levels of government
(federal and state government) into subordinate units (local government) because
the disparities are difficult to be resolved by the self-effort of one
government. The intervention can be significant in terms of the accomplishment
of fiscal equity and an efficient allocation of limited public resources. It is
executed through the practical fiscal policies based on the perspective of
distribution and redistribution in the interdependent governmental relation.
Throughout the
history of government, the intervention of the central government increases
dependence of the lower levels of government. This phenomenon is called centralization,
where administrative power and authority goes toward the central government.
The structural and fiscal features are based on a hierarchy where the roles of
the central government are same as the headquarters of a company, which can
have much more authorities than the subunits. This hierarchical structure
contributes to vertical overlapping among all levels of government for unity of
governmental activities and consistency of public policies, while it causes the
fiscal differences between the central government and the subordinate
governments.
These differences cause financial
imbalance among the different levels of government. The centralized system
allows the central government to have superior fiscal capacity over other
levels of government, so that the central government has dominance to persuade
or mandate another to provide a given service. Therefore, it is difficult for
state and local government to deal with some of their own fiscal issues
independently. Moreover, inefficient conduct of some activities to provide
certain services and the inflexibility of budgetary policy can result from the centralization.
For the reason, the central government has relative advantage in overall fiscal
policies, while another level of government does not have the capacity to
provide its own services. The inequities of fiscal capacities and the
operational inefficiencies provided by centralization do not only seriously
impair the inherently assigned authorities of each government in independent
relations, but also raise the dependence of state and local government on the federal
government.
The intergovernmental grant program
including direct expenditures and financial assistance such as grant in aid, is
one of the major systematic examples of the centralized system based on the
interdependent relationship. “The federal government has increasingly been in
the business of providing aid, with local governments as major recipients,
while state governments act as middlemen, both receiving and paying out large
amounts of grant funds (Break, p5).” The program is broadly regarded as the
combined responsibility of national and state government as the higher level of
government. In fact many local activities are financed by the grants, also the
revenue of state and local governments come from federal grants. Particularly,
the current growth of intergovernmental grants concentrated on major issues
such as education and public health articulates increases of the centralization
in all levels of government as well as a wave of governmental interdependence.
As
mentioned above, the federal system presupposes a complicated structure where
independent and interdependent relations among all levels of government will
coexist inherently. The optimal design of the federal system therefore includes
contradictory governmental relationships. The assignment of authorities and
public resources among all levels of government is constitutionally equal or
fair in the independent governmental relation, while it is substantively
unequal in the interdependent government. In other words, the federal system
works for all level of government in terms of the Constitution, but it does not
work in terms of intergovernmental relation.
The involvement of all levels of government
and each governmental function are based on this intergovernmental fiscal relationship.
The relationship, as the complex mixture of the assigned governmental authority
and actual difference of fiscal capacities among governments, makes
governmental relation more difficult to articulate. Break points out that,
“Recent history provides many illustrations of the eternal ambivalence in the
federal system of government (Break, p12). ”
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