Intergovernmental Fiscal Relations-Three Faces of Tax Sharing - III

Three Faces of Tax Sharing III S Gurumurthi III Horizontal Redistribution of Tax Revenue among Subnational Governments WE now turn our attention to the third and final section of this paper, namely, the horizontal redistribution of shared taxes among the subnaiional governments. Though the distribution of shared revenues among subnational governments is often made on a derivation basis, with each jurisdiction getting the share of the revenue collected in its territory as in the case of Germany for sharing of revenues from the personal and corporate income taxes, this principle cannot be used to correct horizontal imbalances since, under these arrangements. the level of the transfer from the centre to each subnational government is positively correlated with the taxing capacity of the latter In countries with vast regional disparities in levels of development and special problems, it is necessary to evolve appropriate redistributive criteria to apportion the revenues. In Australia, the system of equalisation aims at ensuring equal ability of the states to provide a standard level of public services at an average level of taxation. In Canada, equalisation transfers to provinces are based only on their relative taxing capacities and do not take into account relative expenditure needs. Countries like Denmark. Japan, and Korea use indicators tike demographic characteristics, population density, and length of roads for equalisation. While equalisation grants thus take care of the problem of horizontal imbalances, it is necessary to evolve suitable criteria for redistribution of shared lax revenues among the provinces in order to address horizontal imbalances. While this is particularly important in the ease of developing countries, it would also be significant even in developed countries where regional disparities may be rather large as in the case of Canada.