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While there is extensive knowledge about how to design fiscal decentralization policies, considerably less is understood about how a decentralization program should be sequenced and implemented. Countries embarking on decentralization often struggle with decisions about the essential components of decentralization including the order of an introduction of decentralization policies, the number of years necessary to bring a full program on line, and the components of the transition strategy. We argue that the sequencing of decentralization policies is an important determinant of its success. The consequences of a poorly sequenced decentralization program can range from minor delays and complications to ineffectiveness and subsequent failing support of decentralization efforts, macroeconomic instability, and fundamental failure in public sector delivery. At a minimum, the strategy of "making it up as we go" will not lead to the same structure of decentralization as will a planned strategy. The paper raises two questions: First, is there an optimal sequencing for decentralization policies and implementation? Our answer is that there is, and that following these sequencing rules can reduce the costs and risks of implementing fiscal decentralization. Second, to what extent do countries follow these optimal sequencing rules? The answer is, in general, they do not. The gap between theory and practice is a result of the complexity of sequencing design, which discourages fiscal planners from implement the full process. In addition, sequencing requires a sustained discipline and vision for its implementing, as well as overcoming pressures from political actors, especially in developing countries.

AbstractMany developing countries are putting increased pressure on local governments to mobilize resources, especially to meet the recurrent costs of operating and maintaining locally sited capital projects. Local taxes, user charges and voluntary contributions are all possible mechanisms to carry out these efforts. Yet several important issues arise whenever these mobilization instruments are contemplated and evaluated.Several, often competing, objectives must be considered when evaluating fiscal instruments including the ability of the mechanism to raise revenues, its effect on economic efficiency, its equity implications and its administrative feasibility. After discussing each of these objectives, we show how numerous constraints, including those imposed by the political/legal system, administrative structure, the economy and the culture of the country, must be recognized while searching for a workable set of reforms that will mobilize additional resources without doing great harm to the other objectives. The key to these reforms would seem to be incentives or disincentives inherent in the revenue structure. Without recognizing these incentives or attempting to alter them, resource mobilization efforts are likely to go astray.

"Prepared for the Urban Observatory and the National League of Cities." ; Includes bibliographical references. ; Mode of access: Internet.

Intro -- Half Title -- Title Page -- Copyright Page -- Preface -- 1 The Macroeconomic Setting for Tax Reform -- The Economy in the Pre-1986 Period -- The Cerezo Administration -- The Serrano Administration -- 2 Performance of the Pre-reform Tax System -- Revenue Adequacy -- Compliance -- The Distribution of Tax Burdens -- Vertical Equity -- Horizontal Equity -- 3 Problems with the Guatemalan Tax System -- The Level of Taxes -- Taxes and the Deficit -- International Comparisons -- Coverage of the Tax Base -- Individual Income Tax -- Company Income Tax -- Value-Added Tax -- The Tax Structure and Interference with the Market -- Interest and Inflation -- "Average-Marginal" Rates of Income Tax -- VAT Refunds and Credits -- Tax Administration and Evasion -- 4 Objectives and Approach -- Structural Goals -- Reform Strategy -- 5 Individual Income Tax: Proposals and Reforms -- The Pre-reform System -- The Tax Base -- Tax Rates -- Deductions -- Fringe Benefits -- Interest Income -- Proposed and Actual Reforms -- Flat Tax -- Progressive Rate -- Standard Deductions -- Additional Deductions -- Taxation of All Bonuses -- Taxation of Life Insurance and Pensions -- Taxation of Capital Gains -- Effects of the Reform Program -- 6 Company Income Tax: Proposals and Reform -- The Pre-reform System -- Composition of the Tax Base -- Problems and Reform Issues -- Tax Treatment of Interest -- A Consumption-Based Cash-Flow Tax -- Integration of Company and Individual Income Taxes -- Taxation of Capital Gains -- Fringe Benefits for Workers -- Depreciation Expenses -- Inventory Valuation -- Long-Term Contracts -- Cost of Resource Exploitation -- Treatment of Losses -- Tax Incentives -- Inflation Adjustments -- Taxation of Income Earned Abroad by Guatemalans -- Taxation of Foreign Enterprises in Guatemala -- Treatment of Financial Institutions -- Tax Rates