nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒05‒22
nineteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. The Political Economy of Fiscal Reform in Latin America: The Case of Argentina By Alejandro Bonvecchi
  2. Tax Morale and Compliance Behavior: First Evidence on a Causal Link By Halla, Martin
  3. Decentralization (localization) and corruption : new cross-country evidence By Ivanyna, Maksym; Shah, Anwar
  4. Increasing public expenditure efficiency in oil-rich economies : a proposal By Devarajan, Shantayanan; Le, Tuan Minh; Raballand, Gael
  5. Fiscal competition in developing countries : a survey of the theoretical and empirical literature By Madies, Thierry; Dethier, Jean-Jacques
  6. Cooperation and Punishment under Uncertain Enforcement By Sergio Sousa
  7. Tax Evasion and Swiss Bank Deposits By Niels Johannesen
  8. Aid Financing of Global Public Goods: an Update By Cepparulo, Alessandra; Giuriato, Luisa
  9. The Marginal Cost of Public Funds and Tax Reform in Africa By Auriol, Emmanuelle; Walters, Michael
  10. The Political Economy of Fiscal Reform: The Case of Colombia, 1986-2006 By Mauricio Olivera; Monica Pachon; Guillermo Perry
  11. Do governments tax agglomeration rents? By Hyun-Ju Koh; Nadine Riedel
  12. An Incentive Mechanism to Break the Low-skill Immigration Deadlock By David de la Croix; Frédéric Docquier
  13. The Impact of Cigarette Tax Reduction on Consumption Behavior: Short-and Long-Term Empirical Evidence From Canada By Jean-François Ouellet; Mariachiara Restuccia; Alexandre Tellier; Caroline Lacroix
  14. Tax rates, governance, and the informal economy in high-income countries By Zoë Kuehn
  15. The Shrinking Tax Preference for Pension Savings: An Analysis of Income Tax Changes, 1985-2007 By Gary Burtless; Eric Toder
  16. Tax Evasion, the Underground Economy and Financial Development By Keith Blackburn; Niloy Bosey; Salvatore Capasso
  17. Accidental bequests: a curse for the rich and a boon for the poor By Cremer, Helmuth; Gahvari, Firouz; Pestieau, Pierre
  18. Asia in Global Governance: A Case for Decentralized Institutions By Kawai, Masahiro; Petri, Peter; Sisli-Ciamarra, Elif
  19. Do Barangays Really Matter in Local Services Delivery? Some Issues and Policy Options By Layug, Allan S.; Lavado, Rouselle F.; Pantig, Ida Marie T.; Bolong, Leilani E.

  1. By: Alejandro Bonvecchi
    Abstract: This paper investigates the political economy of fiscal reform activism in Argentina since the late 1980s. Between 1988 and 2008, tax legislation was changed 83 times, fiscal federal rules 14 times, and budgetary institutions sixteen times. Tax and budgetary reforms moved from centralizing revenue sources and spending authority in the federal government to mild decentralization lately. Fiscal federal rules combined centralization of revenues and management in the federal government with short-term compensations for the provinces. This paper contends that reform activism can be explained by the recurrence of economic and policy shocks while reform patterns may be accounted for as consequences of the decreasing political integration of national parties in a polity whose decisionmaking rules encourage the formation of oversized coalitions. The decrease in political integration weakened the national party leaderships’ ability to coordinate intergovernmental bargaining, and strengthened the local bosses and factions needed to form oversized coalitions.
    Keywords: Public finance, Budget, Taxes, Federalism, Intergovernmental relations
    JEL: H77 H61 H20
    Date: 2010–05
  2. By: Halla, Martin (University of Linz)
    Abstract: Recent literature on tax evasion emphasizes the importance of moral considerations to explain compliance behavior. As a consequence scholars aim to identify factors that shape this so-called tax morale. However, the causal link between tax morale and actual compliance behavior is not established yet. Exploiting exogenous variation in tax morale – given by the inherited part of tax morale of American-born from their ancestors' country of origin – our instrumental variable analysis provides first evidence on a causal effect of tax morale on the size of the underground production.
    Keywords: tax morale, tax evasion, tax compliance, underground production
    JEL: A13 O17 H26 Z13 C81
    Date: 2010–04
  3. By: Ivanyna, Maksym; Shah, Anwar
    Abstract: This paper attempts to improve the understanding and measurement of decentralization and its relationship with corruption in a worldwide context. This is done by presenting the conceptual underpinnings of such relationship as well as using superior and more defensible measures of both decentralization in its various dimensions as well as corruption for a sample of 182 countries. It is the first paper that treats various tiers of local governments (below the inter-mediate order of government) as the unit of comparative analysis. In contrast, previous analyses erroneously focused on subnational governments as the unit of analysis which yields invalid cross-country comparisons. By pursuing rigorous econometric analysis, the paper demonstrates that decentralization, when properly measured to mean moving government closer to people by empowering local governments, is shown to have significant negative effect on the incidence of corruption regardless of the choice of the estimation procedures or the measures of corruption used. In terms of various dimensions of decentralized local governance, political decentralization matters even when we control for fiscal decentralization. Further voice (political accountability) is empirically shown to be more important in combating corruption than exit options made available through competition among jurisdictions.
    Keywords: National Governance,Subnational Economic Development,Public Sector Corruption&Anticorruption Measures,Banks&Banking Reform,Governance Indicators
    Date: 2010–05–01
  4. By: Devarajan, Shantayanan; Le, Tuan Minh; Raballand, Gael
    Abstract: This paper proposes that, to increase the efficiency of public spending in oil-rich economies, some or all of the oil revenues be transferred to citizens, and fiscal instruments such as taxation be used to finance public expenditures. The authors develop the case as follows. First, they confirm the well-known result that public-expenditure efficiency is lower in oil-rich countries compared with other developing countries. Second, they show that this efficiency gap is associated with differences in accountability to citizens of government's spending decisions. They find that various measures of accountability are systematically weaker in oil-rich countries. They attribute this difference to the fact that oil revenues typically accrue directly to the government, unlike tax revenues, which pass through the hands of citizens. Third, they show that, controlling for a number of factors, accountability is stronger in countries that rely more on direct taxation to finance public spending. They conclude that accountability, and hence public expenditure efficiency, can be increased by transferring oil revenues to citizens and then taxing them to finance public spending. The paper reviews existing schemes that redistribute oil revenues to the population, such as the Alaska Citizen Fund, to assess the feasibility of a modest proposal in African countries. The authors conclude that, while it may be difficult to implement such a proposal in existing oil producers, there is scope for introducing it in some of Africa's new oil producers.
    Keywords: Subnational Economic Development,National Governance,Public Sector Economics,Public Sector Expenditure Policy,DebtMarkets
    Date: 2010–04–01
  5. By: Madies, Thierry; Dethier, Jean-Jacques
    Abstract: The last two decades have witnessed a sharp increase in foreign direct investment (FDI) flows and increased competition among developing countries to attract FDI, resulting in higher investment incentives offered by host governments and removal of restrictions on operations of foreign firms in their countries. Fiscal competition between governments can take the form of business tax rebates, productivity-enhancing public infrastructure or investment incentives such as tax holidays, accelerated depreciation allowances or loss carry-forward for income tax purposes. It can take place between governments of different countries or between local governments within the same country. This paper surveys the recent theoretical and empirical economic literature on decentralization which attempts to answer three questions. First, does theoretical literature on fiscal competition and"bidding races"contribute to a better understanding of such phenomenon in developing countries? Second, are FDI inflows in developing countries sensitive to fiscal incentives and is there empirical evidence of strategic behavior from the part of developing countries in order to attract FDI? Third, what evidence is there about fiscal competition among local governments in developing countries?
    Keywords: Subnational Economic Development,Debt Markets,Taxation&Subsidies,Emerging Markets,Public Sector Economics
    Date: 2010–05–01
  6. By: Sergio Sousa (School of Economics, University of Nottingham)
    Abstract: This paper investigates the efficacy of a punishment mechanism in promoting cooperative behaviour in a public goods game when enforcement of punishment is uncertain. Experimental studies have found that a sanctioning system can induce individuals to adopt behaviour deemed as socially acceptable. Yet, our experiment shows that a sanctioning system cannot promote cooperative behaviour if enforcement is a low-probability event and free-riding behaviour is not often punished. This supports the view that punishment needs to be exercised to be feared, otherwise the simple threat of it cannot be effective in promoting cooperation.
    Keywords: uncertain enforcement; public good game; altruistic punishment; decisionmaking under uncertainty; cooperation
    Date: 2010–04
  7. By: Niels Johannesen (Department of Economics, University of Copenhagen)
    Abstract: Bank deposits in jurisdictions with banking secrecy constitute an effective tool to evade taxes on interest income. A recent EU reform reduces the scope for this type of tax evasion by introducing a source tax on interest income earned by EU residents in Switzerland and several other jurisdictions with banking secrecy. In this paper, we estimate the impact of the source tax on Swiss bank deposits held by EU residents while using that non-EU residents were not subject to the tax to apply a natural experiment methodology. We find that the 15% source tax caused Swiss bank deposits of EU residents to drop by more than 40% with most of the response occurring in two quarters immediately before and after the source tax was introduced. The estimates imply an elasticity of Swiss deposits with respect to the net-of-source-tax-rate of around 2.75. The estimated elasticity is used to evaluate the efficiency properties of the tax. Given the large responsiveness of tax evaders, we find that the tax is associated with a very significant deadweight loss and that the 35% tax rate scheduled to apply from 2011 is considerably above the revenue maximizing rate
    Keywords: tax evasion; capital taxation; tax competition; savings directive
    Date: 2010–05
  8. By: Cepparulo, Alessandra; Giuriato, Luisa
    Abstract: The paper compares different aggregates of aid financed global public goods and detects the presence, for the period 1995-2006, of the substitution effect between these aggregates and traditional aid that was found by former studies for earlier periods. A second focus of the paper is on the differences in the importance that donors attach to the various types of global public goods, trying to detect regular patterns in their choices of financing. Statistical regularities, representative of common historical, social, cultural factors, for groups of countries (Anglo-Saxon, Northern European and Central European) give rise to the existence of a certain clusterized homogeneity in global public goods financing. Potential explanatory variables are examined in a panel analysis, which reveals the dominance of the donors’ wealth, preferences for public goods and public finance constraints in the decision of aid funding of global public goods. Finally, there is evidence that some global public goods with weakest-link technologies have become increasingly important at the global level. The increase in their financing through aid flows could be explained by the rich countries’ fear of an insufficient provision by poor countries, which, increasingly, cannot afford to pay for them: rich countries are therefore stepping in to avoid sub-optimal levels of provision, as already foreseen by Sandler (1998).
    Keywords: Foreign aid; Global public goods
    JEL: F35 H40 H87
    Date: 2009–12
  9. By: Auriol, Emmanuelle; Walters, Michael
    Abstract: In this paper we propose estimates of the marginal cost of public funds (MCF) in 38 African countries. We develop a simple general equilibrium model that can handle taxes on five major tax classes, and can be calibrated with little more than national accounts data. Our base case estimate of the average MCF from marginal increases in all five tax instruments is 1.2. Focusing on the lowest cost tax instruments in each country, commonly the VAT but not always, the average MCF is 1.1. A key feature of our model is explicit recognition of the informal economy. The larger the informal economy, the higher MCFs tend to be. Extending the tax base to include sections of the informal economy by removing some tax exemptions offers the potential for a low MCF source of public funds, and a lowering of MCFs on other tax instruments.
    JEL: D43 H25 H26 H32 H60
    Date: 2009–11
  10. By: Mauricio Olivera; Monica Pachon; Guillermo Perry
    Abstract: This paper explores the characteristics of the political economy process that conditioned the scope and success of the combination of fiscal reforms before and after Colombia’s 1991 constitutional reforms. Using formal analysis of reforms and interviews with actors, reforms in taxation, decentralization, the budgetary process and pensions are examined in times of political crisis, economic crisis, and economic boom. The results generally confirm the hypothesis that increased political fragmentation and limited unilateral executive power after the 1991 reforms restricted the extent of reforms, particularly in tax law. Nonetheless, the enactment of piecemeal reforms was encouraged by crisis conditions.
    Keywords: Policymaking process, Political economy, Structural reform, Colombia
    JEL: H20 H71 H77
    Date: 2010–05
  11. By: Hyun-Ju Koh (University of Munich); Nadine Riedel (Oxford University CBT & CESifo Munich)
    Abstract: Using the German local business tax as a testing ground, we empirically investigate the impact of firm agglomeration on municipal tax setting behavior. The analysis exploits a rich data source on the population of German firms to construct detailed measures for the communities' agglomeration characteristics. The findings indicate that urbanization and localization economies exert a positive impact on the jurisdictional tax rate choice which confirms predictions of the theoretical New Economic Geography (NEG) literature. Further analysis suggests a qualification of the NEG argument by showing that a municipality's potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.
    Keywords: Agglomeration rents, corporate taxation, regional differentiation
    JEL: H73 R12
    Date: 2010
  12. By: David de la Croix (IRES and CORE, Université catholique de Louvain); Frédéric Docquier (National Fund for Scientific Research (Belgium) and IRES, Université catholique de Louvain)
    Abstract: Although movements of capital, goods and services are growing in importance, workers movements are impeded by restrictive policies in rich countries. Such regulations carry substantial economic costs for developing countries, and prevent global inequality from declining. Even if rich countries are averse to global inequality, a single country lacks incentives to welcome additional migrants as it would bear the costs alone while the benefits accrue to all rich states. Aversion to global inequality confers a public good nature to the South-North migration of low-skill workers. We propose an alternative allocation of labor maximizing global welfare subject to the constraints that the rich countries are at least as well off as in the current “nationalist” (or “Nashionalist”) situation. This “no regret” allocation can be decentralized by a tax-subsidy scheme which makes people internalize the fact that as soon as a rich country welcomes an additional migrant, global inequalities are reduced, and each citizen in the rich world is better off too. Our model is calibrated using statistics on immigration, working-age population and output. We simulate the proposed scheme on different sets of rich countries.
    Keywords: Public Good, Inequality Aversion, Immigration policy.
    JEL: F22 D58 D6 D7
    Date: 2010–05
  13. By: Jean-François Ouellet; Mariachiara Restuccia; Alexandre Tellier; Caroline Lacroix
    Abstract: Several academic studies have been conducted to explore the link between taxes on tobacco products and consumption behavior, especially smoking cessation. While most research has been conducted by comparing static levels of taxation across states or countries, almost none have looked at the dynamic effects of taxes, let alone the context of a tax decrease that is non-homogeneous within a given country, alongside parallel phenomena such as resort to smuggling. Moreover, most research has failed to adopt a contingency framework taking into account potentially influent variables such as age and consumption levels. Using a unique dataset compiled by Statistics Canada, we estimate several models that explore consumers’ behavior towards cigarettes as taxes are rolled back, their resort to consuming smuggled products, as well as a range of individual factors that influence said behaviors. We show effects in the very short term—that is, right after taxes are decreased—and in the long term—that is, a little over one year after taxes have been rolled back. Our results suggest that consumption of smuggled cigarettes is directly and strongly linked to the level of taxes and that this behavior can be efficiently curbed by tax reduction. Tax cuts explain in the range of 17% a smoker’s decision to stop regularly consuming smuggled cigarettes. In addition, our results suggest that taxes themselves play a very limited role in explaining individuals’ propensity to quit or to start smoking, especially in comparison with age and current smoking levels. Our analyses show that, despite statistically significant effects attributable to the large sample size, the part of a smoker or non-smoker behavior that is explained by taxes is very small. In other words, while cigarette tax cuts do reduce propensity to quit or to remain a non-smoker, especially in the long run, they are responsible for about ½ of 1% of this decision. In comparison, models that take into account respondent age or, for smokers, the average number of cigarettes smoked daily, can explain in the order of 5% to 10% the variation in behavior—that is, 10 to 20 times as much as taxes only. These results suggest that, despite their statistically significant influence on smokers and non-smokers behavioral changes, tax cuts from an original level as high as $21 on a carton of 200 cigarettes are not key short-term and long-term behavioral change agents—that is, when taxes are that high, and in a context where about 20% of the population does smoke, tax cuts neither strongly induce non-smokers to start smoking nor strongly induce smokers not to quit smoking. However, they do, where smuggled products are readily available, strongly decrease smokers’ consumption of smuggled cigarettes. This should warrant further investigation of more effective means to curb smoking in this context, such as societal marketing efforts raising awareness of the short- and long-term health hazards associated with smoking. <P>De nombreuses études scientifiques ont été menées afin d’explorer le lien entre les taxes et la consommation des produits dérivés du tabac, plus en détail sur le fait d’arrêter de fumer. Bien que la plupart de la recherche ait été menée en comparant des niveaux statiques de taxation entre états ou pays, presque aucune étude n’a regardé les effets dynamiques des taxes, encore moins dans le contexte d’une réduction de taxes non homogène au sein d’un pays donné, en parallèle à certains phénomènes concomitants tels que le recours à la contrebande. De plus, la majorité des recherches n’ont pas adopté un cadre théorique contingent, tenant compte de certaines variables potentiellement influentes telles que l’âge des consommateurs et le niveau de consommation préalable. En utilisant une base de données unique compilée par Statistique Canada, cette recherche estime plusieurs modèles qui explorent le comportement des consommateurs envers les cigarettes en lien avec une réduction des taxes de même qu’une série de facteurs individuels pouvant influencer ces comportements. Nous distinguons les effets dans le court terme – i.e. tout de suite après que les taxes aient été réduites – et dans le long terme – i.e. environ un an après que les taxes aient été réduites. Nos résultats montrent que la consommation des cigarettes de contrebande est directement et fortement liée au niveau des taxes, et que ce comportement peut être diminué de façon efficace par une réduction des taxes. Une telle réduction explique quelque 17 % de la décision d’un fumeur d’arrêter de consommer régulièrement des cigarettes de contrebande. De plus, nos résultats montrent que les taxes ont un rôle très limité dans l’explication de la propension des individus à arrêter ou à commencer à fumer, surtout en comparaison avec l’âge et le niveau actuel de consommation. Nos analyses montrent que, malgré les effets statistiquement significatifs dus à la grande taille de l’échantillon, la portion du comportement du fumeur ou du non-fumeur qui est expliquée par les taxes est très petite. En d’autres termes, bien que les réductions de taxes sur les cigarettes abaissent la propension à arrêter de fumer ou à rester un fumeur, surtout à long terme, ces réductions expliquent environ un demi de 1 % de cette décision. En comparaison, les modèles qui tiennent compte de l’âge du répondant ou, dans le cas des fumeurs, de la moyenne des cigarettes fumées par jour arrivent à expliquer de l’ordre de 5 % à 10 % du changement du comportement, soit 10 à 20 fois davantage que les taxes seules. Ces résultats suggèrent que, malgré leur influence statistiquement significative sur les changements dans les comportements des fumeurs et des non-fumeurs, les réductions de taxes à partir d’un niveau initial aussi haut que 21 $ par cartouche de 200 cigarettes ne sont pas des facteurs véritablement décisifs pour les modifications au comportement, autant dans le court que dans le long terme. En effet, quand les taxes sont si élevées, et dans un contexte où environ 20 % de la population fume, les réductions des taxes n’incitent pas fortement les non-fumeurs à commencer à fumer ni n’incitent fortement les fumeurs à ne pas arrêter de fumer. Par contre, quand il est relativement facile de trouver sur le marché des produits de contrebande, ces réductions diminuent fortement la consommation de cigarettes de contrebande par les fumeurs. Ce résultat justifierait des recherches futures sur des moyens plus efficaces de mettre un frein au tabagisme, tels que les campagnes de marketing social cherchant à sensibiliser les consommateurs sur les dangers pour la santé (autant dans le court que dans le long terme) associés à la consommation de tabac.
    Keywords: Taxation, Smoking cessation, Tobacco, Behavioral Economics, Taxation, arrêter de fumer, tabac, économie comportementale
    Date: 2010–05–01
  14. By: Zoë Kuehn (Universidad Carlos III de Madrid)
    Abstract: About 16.7% of output in high-income OECD countries was produced informally in 2001-02 (Schneider, 2002). Davis and Henrekson, (2004) show that there exists a positive relation between tax rates and the informal economy for high-income OECD countries. While existing models of the informal economy mostly focus on developing countries where informality is linked to the use of labor-intensive and low productive technologies, this paper studies the mechanisms behind the informal economy in high-income countries. I build a model economy, following Lucas, (1978), in which agents decide to become workers, managers of informal firms, or managers of formal firms. Managers of informal firms use the same technology as formal managers. However, they do not pay taxes but run the risk of getting caught, taxed, and fined. Simulations show that differences in tax rates can only account for approximately 33% of the observed variation in informal economy across high-income countries. When combining differences in tax rates with differences in governance quality, the extent to which these tax rates are enforced, the model accounts for approximately 56% of the cross-country variation in informal economy. Policy experiments show that if all countries attained Switzerland\'s governance quality, average informality would drop by around 15%. I estimate average costs of this policy to be equivalent to at most 26% of the average tax administration\'s budget and find gains in tax revenues to be around ten times larger than these costs.
    Keywords: informal economies; high-income countries; tax rates; governance
    JEL: H2 E26 H26 J24
    Date: 2010–05–12
  15. By: Gary Burtless; Eric Toder
    Abstract: The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.
    Date: 2010–04
  16. By: Keith Blackburn; Niloy Bosey; Salvatore Capasso
    Abstract: We study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation. Agents with heterogenous skills seek loans in order to undertake risky investment projects. Asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self-selection in a separating equilibrium. Faced with these contracts, agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations. The key implication of the analysis is that the marginal net bene?t of income disclosure increases with the level of ?financial development. Thus, in accordance with empirical observation, we establish the result that the lower is the stage of such development, the higher is the incidence of tax evasion and the greater is the size of the underground economy.
    Date: 2010
  17. By: Cremer, Helmuth (Toulouse School of Economics (IDEI, University of Toulouse and Institut universitaire de France)); Gahvari, Firouz (University of Illinois at Urbana-Champaign); Pestieau, Pierre (CREPP, University of Liège and CORE)
    Abstract: When accidental bequests signal otherwise unobservable individual characteristics such as productivity and longevity, the tax administration should partition the population into two groups: One consisting of people who do not receive an inheritance and the other of those who do. The first tagged group gets a second-best tax à la Mirrlees; the second group a first-best tax schedule. The solution implies that receiving an inheritance makes high-ability types worse off and low-ability types better off. High-ability individuals will necessarily face a bequest tax of more than 100%, while low-ability types face a bequest tax that can be smaller as well as larger than 100%. With a Rawlsian social welfare function, the low-ability types too face a more than 100% tax on bequests.
    Keywords: Accidental bequests, estate tax, tagging, first best, second best
    JEL: H21
    Date: 2009–11
  18. By: Kawai, Masahiro (Asian Development Bank Institute); Petri, Peter (Asian Development Bank Institute); Sisli-Ciamarra, Elif (Asian Development Bank Institute)
    Abstract: The global economic crisis refocused attention on the governance of international economic institutions (IEIs). This study uses the analytical framework of club theory to highlight structural obstacles to reform in international macroeconomic management, development finance, trade, and financial stability. The authors argue that reforms currently being discussed—for example, in voting power in the International Monetary Fund and the World Bank—are important, but not sufficient to make IEIs adaptable to the demands of a rapidly changing world economy. The authors propose transforming IEIs by shifting more decisions from the global to sub-global level. Partially decentralized decision making already exists in some policy areas (for example in regional development banks) and could expand and improve the provision of international public goods.
    Keywords: global governance decentralized institutions; decentralizing international economic institutions; international institution reform
    JEL: F02 F13 F33 F42
    Date: 2009–10–20
  19. By: Layug, Allan S.; Lavado, Rouselle F.; Pantig, Ida Marie T.; Bolong, Leilani E.
    Abstract: <p>This paper, which is borne out of the need to address scarcity of evidence-based studies on barangay financing, analyzes and evaluates key issues on financing of devolved functions at the barangay level, with particular focus on fund utilization and program allocation, and proposes some policy options addressing the issues. Its key findings include: (i) there is a mismatch between financial capabilities and devolved functions owing to limited funds being spent mostly on personal services, with little money left to finance these functions; (ii) different priorities of barangays mean different utilization of their Barangay Development Fund (BDF), with some of them failing to spend on important basic services such as education and health, as well as on economic development sector; (iii) like other barangays, those in the study areas in Agusan del Sur and Dumaguete City are found to be highly IRA-dependent, with IRA comprising 85 to 97 percent of total income; (iv) barangays are not addressing the misalignment of revenue and expenditure assignment, as well as the counter-equalizing and disincentive effects of IRA, by not raising enough own-source revenues in their localities and optimizing their use of corporate powers (as evidenced by zero percentage on borrowings, for example).</p> <p>As a policy intervention strategy to help barangays financially and eventually matter in local service delivery, this paper proposes three major options, namely: (i) giving the barangays the option of allowing the higher LGUs to deliver the development-enhancing services such as education and health that they themselves cannot deliver effectively and sustainably; (ii) making a paradigm shift in understanding and practicing barangay economic development by spending their BDF mostly on economic-enhancing activities aimed at increasing their coffers which would eventually enable them to fund other sectoral responsibilities; and (iii) giving incentives to barangays that excel in their own-source revenue performance and creative use of corporate powers.</p>
    Keywords: local government unit, local revenue, local government unit expenditures, devolution, decentralization, local government code, decentralization capability, local governance, decentralization and service delivery, institutional design for decentralization, local development
    Date: 2010

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