Co-moves of Sub-national and Central Government Tax Revenues in European Countries

Abstract

The aim of the paper is to elicit the nature of the co-moves of sub-national and central governments´ tax revenues employing main types of shared taxes -the personal income tax and the corporate income tax. Estimating the instrumental variable panel model based on the two stage least square estimator, the relationship between the sub-national government tax revenues and central government receipts from income (shared) taxes is investigated on the sample of 28 countries (EU and UK) in the period of 1995-2019. Expectation about inverse relationship is based on countermove of central and sub-national governments´ portions on shared taxes assuming that sub-national tax revenues are importantly affected by revenues from shared tax. However, results show, that observed negative effect of central government receipts from shared tax on sub-national tax revenues origins in overall decrease of receipts from income taxes in a notable part of the monitored period and in simultaneous increase of other sub-national tax revenues. Expecting cuts in income taxes due to the financial crisis, subnational governments sought for other taxable resources and generated the additional tax revenue and increased their total tax revenues significantly. Additionally, the heterogeneous period covers beside the break caused by the financial crisis also certain breaks corresponding to structural reforms in post-communist countries. Both require centrally provided stabilization and redistribution and are resource demanding, what is against the shift of resources to lower government levels, what creates the same impetus for sub-national governments in aim to seek for other tax resources.