Principles of federal finance

June 11 2016

National governments have to follow certain principles for allocating fund and functions among governments among various levels.

1) Fiscal autonomy: Each government in a federation should be free to raise revenue and spend them. Autonomy should be given in fiscal matters: fixing taxes and tax rates, collecting taxes and giving tax relaxation. Thus for a good federation, fiscal functions and powers of the governments in a federal system should be clearly defined. Constitutional status has also to be given.

2) Adequacy of means and flexibility: There should be adequate resources for all governments in a federation to meet requirements. Then only fiscal independence would be meaningful. Revenue allotted to collect should be enough to meet the requirements of the federal governments. It should be flexible also. As requirements change or expand from time to time, government should be able to raise adequate revenue through increasing tax rate or introducing new taxes.

3) Equity: Equity in federal finance can be analyzed from two points of view. First, resources allocated or the right given should be enough so as to give each level of government in a federation a fair share of revenue. Second, equitable treatment to individuals and firms in different places is need. Same criteria should be placed for similar tax payers.

4) Economy: Economy is an important criterion of efficiency. Transaction should be kept minimum or revenue raised should be adequate to meet the requirements besides the tax collection and transaction cost.