“Analysis on Main Advantages and Disadvantages of Devolution and Fiscal Federalism: Is a Hybrid Solution the Cure?”
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“Analysis on main advantages and disadvantages of devolution and fiscal federalism: is a hybrid solution the cure?”
All countries in the world, regardless their degree of development, size, complexity or their form of government, must tackle an important choice when it comes to decide how the power is distributed between the central government and the sub-national entities who exercise governmental functions at local level. The two possibilities at the end of the spectrum, i.e.: complete decentralization of powers to local bodies on the one hand and total centralization of administrative and fiscal powers in the central government on the other hand, are often not feasible since both entail downsides that could hinder the sound…show more content… Also, allowing local governments to collect taxes entails the creation of revenues that can then be used to increase the performance of the local economies, positively affecting companies operating locally.
In fact, the proceeds from taxes now kept at local level will increase the disposable income of sub-national governments, allowing the latter to operate with less tight budget constraints and thus to reduce the fiscal burden applied to individuals and private companies, eventually inducing sounder local economic conditions and development.
Moreover, the choice of allowing fiscal decentralization may strengthen horizontal competition amongst sub-national jurisdictions, which, in order to maximize their revenues, will try to attract more companies and wealthy individuals enacting favorable laws and applying different tax-rates, resulting in a better overall environment for the country as a whole.
Still, it must be noted that greater competition definitely increases the pressure on local governments, which are now asked to develop and innovate in order not only to attract such proceeds stemming from taxes, but also to retain them, by continuously investing in welfare and creating an environment that is suitable for business activities.
Furthermore, reducing the overall central government’s intervention (by means of fiscal transfers,