Project Paper - Session 6
"The Central and Local Governments: Redesigning Intergovernmental Fiscal Relations" (Abstract of Discussion Paper 04-J-016)
On the basis of the government's "trinity" decentralization reform mapped out in June 2003, this paper clarifies the problems surrounding the current local public finance system and discusses concrete procedures for implementing decentralization and redesigning the fiscal relationships between the central and local governments. Drawbacks that the trinity reform may have are referred to. With regard to the transfer of tax sources from the central government to local governments, a step proposed under the government's scheme, the paper acknowledges that such a reinforcement of local taxes is needed to realize decentralization. At the same time, however, the paper calls for the (substantive) transfer of taxation authority and provides specific taxation items suitable for such transfer, noting that simply transferring tax resources is not enough to achieve its intended goal. Also, the paper discusses the reform of the local bond system, pointing out that the current system hardly makes local governments conscious of being lenders, thus effectively fomenting lax fiscal management. In addition, the paper refers to the need for legislation on local government bankruptcies. Furthermore, it discusses the reform of the local allocation tax system with regard to problems stemming from the mutually complementary relationships within the local bond system. Finally, the paper sets out concrete reform procedures necessary to promote decentralization in the future.