Fiscal Federalism: Normative Criteria for Evaluations, Developments in Selected OECD Countries, and Empirical Evidence for Russia

Abstract

Criteria for evaluation of systems of fiscal federalism are derived from the current state of the theory of fiscal federalism. In a second step we provide an overview of developments of fiscal federalism systems in OECD countries highlighting some existing trends. Third, an overview of Russia?s regional economic characteristics underlines several reasons that call for a redistribution of income among regions. Fourth, we apply the defined evaluation criteria to Russia?s system of fiscal federalism. We find that there has been effective equalization of income to regions with relatively low per capita income but it was mainly the medium income group of regions that carried the burden for this redistribution. Several relatively very wealthy regions were ?according to our data- persistently subsidized through the system. Fiscal equalization may have caused significant disincentive effects for subnational governments because efforts to improve their tax base and raise tax revenues tended to result in a higher net share of tax revenues to be transferred to the central government. The transfer system had major weaknesses, especially that of promoting bargaining between regions and the center, which may not have been solved through recent reforms of the system. Also a very important element of fiscal federalism is almost absent, namely revenue discretion on the part of subnational governments. Hence, the paper makes reform proposals.