Eugen dogariu.pdf

8/11/2019 Eugen dogariu.pdf

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President of the Editorial Board Ioan TALPO

Editor-in-Chief

Marilen PIRTEA

Assistant -Editor-in-Chief

Carmen BBI

Senior Editor

Alexandru JIVAN

Editors Costinel DOBREDoina DNIAVasile DOGARUCamelia MARGEA

Language Advisors Monica BOLDEAAnca MAGHEIUIulia PARA

Editorial Secretary

Alina ALMAN

Miruna NCHESCU

Webmaster Romeo MARGEA

Editorial Board

Robert W. ACKRILL Nottingham Trent University, United Kingdom

Vasile COCRI Alexandru Ioan Cuza University, Iai, Romania

Maurice CHENEVOY Universit dAuvergne Clermont-1, France

Franois FULCONIS Universit dAvignon et des Pays de Vaucluse, France

Orio GIARINI LIstituto del Rischio, Trieste Milano Ginevra

Aurel IANCU National Institute of Economic Research, Bucharest, Romania

Vasile IAN Alexandru Ioan Cuza University, Iai, Romania

Nigel HEALEY University of Canterbury, Christchurch, New Zealand

Dinu MARIN Academy of Economic Studies, Bucharest, Romania

Dumitru MATI Babe-Bolyai University, Cluj-Napoca, Romania

Kozo MAYUMI University of Tokushima, Japan

Philippe ROLLET Universit des Sciences et Technologies de Lille, France

Mihai ROMAN Academy of Economic Studies, Bucharest, Romania

Guy SOLLE Institut dAdministration Economique de Metz, France

Ion STANCU Academy of Economic Studies, Bucureti, Romania

Nadine TOURNOIS Universit de Nice Sophia Antipolis France


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T

ableo

fconte

nt

Internationalization of Large Retailers and Cross-Cultural Determinants

The Singular Trajectory of Carrefour in Romnia .......................................129

Franois CASSIEREGilles PACH

Rating Agencies on the International Financial Market: an Approach

in Terms of the Transaction Cost Economy ................................................139

Monica DUDIAN

Theoretical Aspects of Optimizing The Allocation of Public Financial

Resources at Local Level ......................................................................147

Eugen DOGARIU

Meta Tables, Meta SQL Instructions and Gdels Theorems

of Incompletness ..................................................................................157

Lszl ILLYS

Game Theory and Economic Behavior ......................................................161

Nicoleta SRGHI

Creative Economy-Feasible Option for Romnia ........................................167

Marta-Christina SUCIUMaria-Liana LCTUMina IVANOVICI

Country Risk Barrier or Key Factor of Globalization ..................................175

Elena-Mihaela ILIESCUMarilena CIOBNAU

Considerations on The Convergence of Romania to The European Union

in The Banking Field ..............................................................................183

Costin Daniel AVRAM

Veronel AVRAM

The Economic Rationality in a Period of Crisis ...........................................189

Mariana IOVIU

A New Educational Model for Criminality Prevention ..................................193

Emilian M. DOBRESCUTiberiu-Viorel POPESCU

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Key Words:

public

expenditure,

local authorities,

Armey, optimum,

welfare.

JEL Classification: H72

The allocation of financial resources at local,

but also at central level, is an issue

especially since in times of crisis, finding the

optimum way to spend public funds

concerns all authorities. This paper aims to

identify the ways in which, by leaving from

the division of powers based on the

allocation of resources and tools available,

the local authorities can identify an optimal

level of public expenditure so as to achieve a

maximum level of using them. Also, the

paper seeks to identify the impact that the

local public expenditure can have on the

development of local gross domestic product

as an expression of social welfare.

Starting from the scientific acquisitions ofDick and Richard Armey, the "Armey Curve"

was revised, thus identifying two

components of the public sector: a central

one and a local one. Following that, a chart

relationship was established between the

allocation of local public funds and the social welfare expressed by

the local gross domestic product. By analyzing the shape of this

chart, two econometric models have been developed: one

regarding the impact of local resource allocation, and another one

setting the optimal level of allocation of local public funds.

THEORETICAL ASPECTS

OF OPTIMIZING

THE ALLOCATIONOF PUBLIC FINANCIAL

RESOURCES

AT LOCAL LEVEL

Eugen DOGARIU

* West University of Timioara

1. Allocation of the public financial resources oflocal communities

The financial resource allocation policy is stronglyconnected with the financial resources of localcommunities, the main instruments being: local tax levies,financial transfers, local public borrowings and balancemechanisms. All these elements allow both to locallyattract financial resources and to allocate them for theproper functioning of those entities.

1. Local tax levies refer to the total tax liability of thenature of taxes and contributions, which play animportant role in all financial resources spent at lowerlevels of administration - state and local governments. In1993, Richard Bird claimed in the article "Threading theFiscal Labyrinth: Some Issues in Fiscal Decentralization",that, as a theoretical issue, a local tax levy must possessthe following attributes: "the structural characteristicsshould be made by the local authority, the tax rate shouldbe set locally the taxable subject should be positioned inthe local authority and the local entity should be the

recipient of the tax levy."1

The main local tax levies applicable in a federal systemare: own tax levies in the technical sense, co-partnershiptax levies, additional tax levies and surcharges extra.

a. Own tax levies in the technical senseare all categoriesof duties which a public authority can institute underfederal and state laws. As such, junior public entities havefull power to set the tax basis and rates, the tax levyaddressee and the perception way.

In the article " Financing Public Expenditure: The Role ofTax Reform and the Designing of Tax System, 1991, JeffreyOwens articulated several factors according to which alocal tax levy is considered to be optimal:

the tax flow is significant in terms of value;

a high manoeuvrability of fiscal parameters isallowed;

1Bird Richard, Threading the fiscal labyrinth: some issues infiscal decentralization, National Tax Journal, Vol. 46, No.2,June 1993, pag.213.

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Eugen DOGARIU

the tax base is irremovable;

the translation of the tax burden is not allowed;

the tax levy is easily acquired by the taxpayer;

there is a territorial correlation between the taxdebt and the public service;

to be charged in accordance with thecorresponding powers of the public body practicingit.

b. Co-partnership tax leviesare the tax levies mobilised tothe order of the higher administrative levels, but byproviding a parallel percentage share of the debt value ofjunior authorities. Neither the technical aspects ofmandatory levy, nor the co-partnership rates areestablished at a lower level, but at a higher level, theregional and local bodies having no power of decision inthis regard.

c.Additional tax levies illustrate the tax levies charged bypublic entities of lower rank, by raising additional tax ratesfrom the same taxable matters which is subject of taxationat senior level too. Therefore the tax base generates a taxlevy mobilized at senior level, but also a tax levyattributable to lower rank authorities, calculated by addinga rate of taxation on the same basis (additional shares areestablished by lower level courts within the limits set bythe senior rank authority).

d. Surcharges reveal tax levies that can be establishedand set according to some tax laws issued in the firsthigher level, no legal framework, especially central, being

necessary. The only limitation to the practice of such taxlevy that is given by the fact that it must not causedistortion effects, which is a case when the centralauthority distribution policy would be harmed.

2. Financial transfers are financial resources throughwhich lower rank authorities supplement their needs offinancial resources, in order to achieve various objectives,in the form of financial transfers made, on the one hand,from the federal budget to state budgets and on the otherhand, from the state budget to local budgets.

The most common types of relationships found in financialpractice are: conditional transfers, unconditional

transfers, compensatory transfers, non-compensatorytransfers, limiting transfers, non-limiting transfers, openrefunds and "ad hoc" transfers.

a. Tax transfers or sharing transfers (revenue sharing)is afraction of a certain type of tax attributable to localauthorities, resulting from an operation of sharing thesame tax base or the same tax with the central authority.

These "factions" are regarded as budget transfers as theirsetting is made strictly by the central government, both interms of choosing the type of shared tax levy, but also interms of choosing the tax rate.

The process of practicing fiscal transfers give them threeconcrete expression variants, namely: the form of ratesdeducted from some taxes of the central budget, the formof the amounts deducted for the benefit of the local

budgets and the form of additional rates of certain directtaxes.

rates deductedfrom some central budget taxes arepercentage shares of certain taxes by the centralsource, determined by annual budget laws, underwhich, during the budget year, revenues from thesetaxes are shared between the central budget andlocal budgets.

amounts deductedfor the benefit of local budgetsshow absolute value amounts, provided in annualbudget laws, which are granted to local authoritiesfrom the actual collections from a particular taxrepresenting an income of the central budget.

For example, the technique of rates and amounts split forthe benefit of local budgets from the income tax ispracticed in Romania, as well as the amounts deductedfrom the value added tax. Determining the amount of splitamounts is based on careful calculation formula and thecriteria considered are similar to those met in case ofinter-regional / local balance transfers.

additional rates to certain direct taxes are apercentage that, under the annual budget laws, areadded to those used for calculating those centraltaxes and are incomes of local budgets, beingconsidered as true "local taxes related to state

taxes2.b. Conditional transfers (conditional grands) reflectconditional financial transfers to local courts, which canbe used by these depending on the completion of certainactivities, measures or targets, in many cases of a bindingnature. The purpose of practicing such transfers is aimedboth at promoting national policy priorities locally or atpreventing sub-optimal provision of public goods atterritorial level.

c. Unconditional transfers (unconditional grands) areannual financial transfers to local authorities, which canbe freely used by them, without restriction. Theirestablishment and distribution on the lower levels isperformed by the central authority, based on the so-called"distribution models", based on complicated computeralgorithms, even "occult" sometimes.

d. Compensatory transfers (matching grands) illustrate aform of conditional transfers, provided by the CentralAuthority to the local authorities, when these engage in asustained way in a certain area or activity. They areprovided to the extent that local communities alsoundertake to make a comparable effort in a particular

2

Trotabas Louis, Finances publiques, Ed. Dalloz, Paris,1964, pag. 471.

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THEORETICAL ASPECTS OF OPTIMIZING THE ALLOCATION OF PUBLIC

FINANCIAL RESOURCES AT LOCAL LEVEL

area considered appropriate by the central governmentand where it seeks funding boost.

e. Non-compensatory transfers (non-matching grands)

concern transfers provided from the central budget withno additional funding commitment from local authorities.

f. Limiting transfers are annual transfers the amounts ofwhich shall be determined strictly from the beginning, inabsolute terms, as they are strictly limited.

g. Non-limiting transfers imply a commitment by thecentral authority, which can achieve different levels,depending on the needs felt by local authorities.

h. Open refunds (cost rambursment)are commitments bywhich the government undertakes to repay a certain rateof the costs incurred by local authorities when theyimplement local government policies.

The development of such arrangements involves threedistinct steps:

defining, by the government, of public services forwhich it guarantees the complete or partialcoverage of costs;

preparation, by the central authority, of transfersable to cover costs incurred by local authorities forlocally implemented public services of nationalinterest;

carrying out, by the government, of transfers tocover local guaranteed costs.

Open refunds offer notable advantages: they can be useddirectly in major national importance financing; theyrelieve regional and local budgets of significantexpenditure; they shift funds according to priorityprinciples; they reduce the sub-optimal provision of publicgoods nationwide.

With all the advantages conferred, open refunds alsogenerate a series of obstacles: "they undermine localoptions, delay the process of financial decentralization,discourage the local initiative and, as their promoters arethe central authorities, they increase the pressure on thecentral budget expenditures, to which, additionally, thecosts incurred by monitoring related programs to the

conduct of those operations are added."3

i. "Ad hoc" or "ex post" transfers (ad hoc or ex post grands)

are discretionary transfers made of funds available to thegovernment to the favour of local communities, whichsupported during the election campaign the ruling party orcoalition. The recipient local entities may consider themreal "rewards" from the government for the accepted"political orientation" and their practice often create inter-regional conflicts.

3Bahl Roy, Intergovernmental transfers in developing and

transition countries: principles and practice, EconomicDevelopment Institute, World Bank, 1999, pag.7.

3. Local public loans illustrate financial resourcesattracted from the capital market, domestic or foreign, incontractual terms, by the payment of interests, byproviding benefits to subscribers, as well as by

reimbursing in the future the amounts such contracted.Through these, together with the financial transfers, thelocal authorities complete their need of financialresources.

This way of adding financial resources is appealed to onlyto the extent that current income tax levies, plus financialtransfers, do not cover the borrowing need of a lower rankauthority. Also, such an arrangement may be appealed toas far as the public entity wants to conduct a series ofinvestment programs with local impact or have to dealwith some extraordinary expenses.

4. Balance mechanismshave for foundation the fact that

state authorities should ensure a consistent supply ofpublic goods across the state, whether or not theterritorial community is rich or poor. Although this isundoubtedly related to the fiscal capacity of thecommunity (general tax potential of the community),however, a number of impediments to achieving thedesire turn up in reality, that do not only take into accountthe degree of economic development but also thepreferences of citizens.

Practically, solving these impasses is achieved by applyingvarious models of balance, grouped by Richard Musgraveinto six classes. The author presented this classification inan article entitled "Approaches to a Fiscal Theory ofPolitical Federalism", held in the seminar "Public Finances:Needs, Sources, and Utilization", organized by PrincetonUniversity in 1961.

The first class of models consists of the fact that thebalance is done through public expenditure per capita,meaning that every citizen is ensured the same volume ofpublic services, regardless of its residence. Unfortunately,the model does not ensure that the principle of diversity isapplied.

The second class of models is based on the balance ofperformance, defined as the ratio of the publicexpenditure per capita and the beneficiary index ofnecessity. This arrangement partially resolves theapplicability of the principle of diversity.

The third class of models takes into account thedifferences existing between communities, both as needfor public goods, and as tax capacity. In other words, themechanism involves determining, at a central level, theaverage level (standard) of the "individual public necessity- tax capacity", which will be compared with that of thecommunity. In case of communities the index of which issituated below the standard level, the difference coverageis done by the federal government through the granting ofsome transfers financed by central proportionate taxes,

especially established for this purpose.

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The fourth class of models is very similar to the onebefore, only that the transfers due have for value thedifference resulting from the tax revenues that would beobtained by applying the proportional rate on an average

taxation basis (a taxation basis determined as average atthe central level) and the tax revenues that are obtainedby applying the same proportional rates to the effectivecommunity taxation basis.

The fifth class of modelsseeks to ensure the same levelof performance between communities through tax levies,which will be differentiated from one community toanother. The deficit caused to the federal budget iscovered on account of shares of tax revenues collected atlocal level, due by them proportionately.

The sixth class of modelstakes into account both the taxpotential of the community, and the need for public goods,

the balance being performed via both componentsthrough transfers from the superior authority. Thismechanism provides a combination of almost all theprevious models and has the great advantage that itdiscourages the tendency of some communities to playthe role of a stowaway.

In a restrictive sense, all the six classes of modelspresented by Musgrave should concurrently provide, byfunctionality, the vertical balance of the budget system.

ertical balancing of the budget system

(vertical balance)is a quite argued topic currently and closely related to theinternal budget connections, which refer to "the disparity

existing between the means to mobilise revenues and theexpenditures to be made at various levels of government.4

In other words, vertical balancing a budget is derived fromdividing the overall multilayered modern public financeand can reveal the correlation that exists between theexpenditure responsibilities of local authorities andpowers conferred on them by law in the spectrum ofbudget revenues. Measuring vertical balancing the budgetsystem can be achieved in conditions where an imbalanceis the result of irrational use of resources or a localfinancial mismanagement and other central governmentprovides public goods with maximum efficiency.

The first indicator to quantify vertical balancing of thebudget system was built for the first time in 1977 byJoseph S. Hunter, being called by this one "verticalbalancing factor."

According to the authors vision, the calculation formula ofthe coefficient has the form:

=

loc.

Gloc.

EvCt

Vt1k (1)

4Nobuki Mochida, Revenue, expediture and

interguvernmental transfer in Japan, Workin Paper,Faculty of Economics, University of Tokio, 1997, pag.4.

where:

Evk is vertical balance coefficient;

Gloc.Vt reflects the total revenue of local authorities underthe central government control;

loc.Ct shows total expenditure of the budgets of local

authorities

The indicator quantifies the part of expenditure made oflocal budgets which are funded from sources controlled bylocal authorities and the imbalance is even greater as thecoefficient value is close to zero.

Currently, measuring the vertical balancing of the budgetsystem is done through "vertical balancing index of thebudget system", built in basis of the expenditure of localbudgets, local tax revenues and the consolidated generalbudget revenue and expenditure.

Mathematically, the relationship of calculation has theform:

tot.

fisc.

tot.

loc.

B.Vert.

Vn.

Vn.

Ch.

Ch.

I = (2)

where:

B.Vert.I is the index of vertical balancing of the budget

system;

loc.Ch. means local jurisdictions of expenses;

tot.Ch. are the consolidated general budget expenditures;

fisc.Vn. illustrates the tax income of local authorities;

tot.Vn. reveals the incomes of the consolidated general

budget.

We note that if the indicator has over-unitary values, thelocal budget expenditures cannot be fully funded at theexpense of local tax revenues, the budgetary system isunder-balanced, which causes extensive financialresources through budget transfers from the centralauthority.

Unlike the previous situation, if the balancing index isunder-unitary, the local tax revenues are ahead of localcosts; which means an over-balancing of the budgetsystem and gives a greater role in local tax jurisdictions.

According to these remarks, the closer the verticalbalancing index is to no. 1 value, the more equitably

shared the authority in terms of revenue and spending is

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between the central government and the localjurisdictions, the volume of inter-jurisdictional transferscompresses and the budgetary system is approaching tothe steady state between supply and allocation.

The distribution of powers in terms of revenue andexpenditure on levels of administration is a matter to beresolved partly, as it has its roots in the school of fiscalfederalism and in the organization of federal state power.As such, state federalism implies a hierarchical structureof state governance in which every individual issimultaneously a citizen of at least two governments,which generates serious implications for the publicfinance system. Under such an arrangement, from afunctional point, there should be no impediment, shouldthe population be stationary demographically (people notchange their residence with a high frequently).

Unfortunately, in reality, the population is not stationary,but highly mobile, which causes strong mutations in thearea of public sector whereas individuals will "move" onthe ground and according to the fiscal policy measuresthat the authorities of different levels of governance willtake.

Furthermore, the ability of citizens to "migrate" from onejurisdiction to another according to certain fiscal policycriteria calls forth, just like in the private sector, theemergence of competition between public authorities - taxcompetition (fiscal competition), each trying to satisfy asfar as possible the taxpayer desires in terms of the "paidtax levy - public goods received" ratio.

To all these issues of public finances, which rest with theactivity of a federal system, the representatives of theschool of 'fiscal federalism' are trying to answer; this is aschool of thought emerged in the U.S.A. in the '50s,studying the system of taxation and public expenditure interms of powers returning to the governance of a nation atits various levels, from the central one to the local ones.

The analysis of "the theory of fiscal federalism" (The theoryof fiscal federalism) are focused, as such, on the twocomponents of fiscal policy (taxation and publicexpenditure) and the idea of preserving the integrity of thestate, must lead to the conclusion that the redistributionfunction of incomes and wealth in society as a whole,should be attributed to the central authority.

A. Distribution of powers in terms of revenue

5 on thecomponents of the administration system - conferringauthority on incomes (tax assignment) - involves sharingthe taxable matter between the central (federal) authorityand the other jurisdictions (states composing thefederation and local authorities).

5Mutacu Mihai, Enache Eugen Cosmin, Dnuleiu Dan,Crneac Alexandru, Dogaru Eugen, Ptru Roxana,

Modele de finanare a dezvoltrii regionale, Ed. Mirton,Timioara, 2007, pag.33.

The territorial mobility of contributors and capitalunfortunately causes a number of shortcomings toachieve that goal. When a local authority imposes a hightax or leads an aggressive redistributive policy, its citizens

tend to leave it, seeking a less hostile tax environment.

The hardships caused by the mobility of taxpayers wereobserved in 1956 by Charles M. Tiebout, who in the paper"A Pure Theory of Local Expenditures" argued that thegreat advantage of a multi-jurisdictional system is that itallows individuals to "vote with their feet"6 or, in otherwords, they may opt for a combination of public servicesand local taxes that maximizes their utility, which createsthe emergence of an "inter-jurisdictional competition".Tiebout also thought that if all citizens had the freedom ofchoice, then the social wealth level can reach the climax.

Against this background, Richard Musgrave appreciated in

1959, in the monumental work "The Theory of PublicFinance", that the redistribution function should beattributed to central government. Later, in 1983, hemanages to deliver some revenue-sharing rules betweenthe links of the system of public finance: the taxes andcharges with an increased progression should be orientedto public authorities located in the upper levels, the taxeson the profits of companies should be allocated to theinterim authorities and the tax levies with an immovabletaxable basis should be assigned to lower rank entities.

Contrary to Musgrave's thinking, in 1973, Mark. V. Paulyadmitted in the article CA Model of Local Government andTax Capitalization", given the mobility of citizens in theterritory that the redistribution function can be considereda true "local public good"7and, as such, it should be closeto local authorities.

Among those who subsequently develop the rules ofMusgrave, there is also Richard Bird and FranoisVaillancourt, who in the article entitled "Dcentralisationfinancire et pays en dveloppement: concepts, mesureet valuation", in 1997, reveal that "the main criterion ofdivision is given the mobility of the trim tax or its ability tomove from one tax jurisdiction to another, in order toprevent its partial or total circumvention from taxliabilities8.

The more mobile the trim tax is, the more it should besubject to the jurisdiction of a higher hierarchicalauthority. The trim tax on property tax is by definitionimmobile, these taxes being a good source of revenue tofund local services, in this respect they having to bedeployed at lower echelons.

6Tiebout M. Charles, A pure theory of local expeditures,Journal of Political Economy, No.5, Octomber, 1956.

7Pauly V. Mark, A model of local government and taxcapitalization, Journal of Political Economy, No.10, 1976.

8Bird Richard, Vaillancourt Franois, Dcentralisationfinancire et pays en dveloppement: concepts, mesure

et valuation, Working Paper, University of Toronto,1997, pag.5.

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In the case of income taxes of individuals and of indirecttaxes (VAT, excise and customs duties), their trim tax ismuch more mobile than the trim tax corresponding toproperty, but without exceeding it, in this view, that of

capital tax. From this viewpoint, many scholars considerthat income taxes should be mobilised at the central levelin order to ensure, in this way, the general policy of thecentral authorities in terms of income redistribution in theeconomy, and indirect taxes should provide resources tothe authorities of local origin.

Finally, the trim tax of income taxes of legal persons ischaracterized by a very high mobility, which determinesthat these tax revenues are allotted, with few exceptions,to the administrative links located at high hierarchicallevels.

In 1991, noting that "the function of redistribution should

be implemented centrally through transfers"9, RobertInman and Daniel Rubinfeld propose, in the article "FiscalFederalism in Europe: Lesson from the United StatesExperience", an attractive option to solve the impedimentscaused taxpayers and capital mobility.

Two prominent representatives of the school of publicoptions of Chicago, Geoffrey Brennan and JamesBuchanan, attack in 1980 the concept of "taxcompetition" or "inter-jurisdictional competition. If thefiscal policy is hyper-centralized, then the costs incurredby local authorities largely depend on the transfers fromthe central government.

In this way, the authority on local income is restricted, andthe inter-jurisdictional competition has no moresubstance. The revenue allocation "should be determinedon the basis of what can be considered a good central taxand a good local tax, while the administration andcollection of tax revenues should be the burden of thecentral authority, since it exhibits a strong managementvalence to the economy of scale"10

B. The distribution of powers in terms of expenditures onthe components of the administration system - conferringauthority for expenditures (expenditure assignment) -must "carry out a demarcation between what is financedfrom a budget or another, depending on which thedistribution of allowances between the links of the budgetsystem is made."11

Friedrich von Hayek showed in September 1945, in thearticle "The Use of Knowledge in Society", published in theAmerican Economic Review, the importance of

9Inman Robert, Rubinfeld Daniel, Fiscal federalism inEurope: lesson from the United States experience,Working Paper, University of California, Berkley, 1991.

10Adams Charles, Mackenzie A. Gordon,Intergovernmental fiscal relations: the chinese system inperspective, Working Paper, International MonetaryFund, 1997, pag.7.

11

Talpo Ioan, Finanele Romniei, Vol.1, Ed. Sedona,Timioara, 1995, pag.90.

decentralization of decision making at various levels ofadministration, based on the idea that local information isa usually "good information". In the context of publicfinances, because local authorities have better

information than the central authority on local conditions,and sending it to the higher level would be costly andwould distort it, local jurisdictions can make betterdecisions in the provision of public goods compared to thecentral entity.

Charles M. Tiebout, entering in 1956, in "A Pure Theory ofLocal Expenditures", the concept of "tax competition",argues that this competition between the lower levelpublic authorities is also the result of the fact that citizensare able to move to the jurisdiction that provide them withpublic goods according to their preferences.

Such a phenomenon would be absent if the central

government would finance at a large scale the productionof public goods, and their provision should be uniform inthe state.

In 1957, in the article "Tenable Range of Functions ofLocal Government", George Stiglerjustifies the importanceof local authorities, but also of public goods provision bythese, in virtue of two so-called principles.

The first principle relates to the fact that a localjurisdiction "works better"12 than the central government,provided that it receives the individual utilities andpreferences of citizens more accurately, "according to thedemocratic rule - one person one vote"13.

The second rule illustrates the ability of a group of citizensin a given geographical area, to choose by voting theprovision of certain public goods of common interest. In1959, Richard Musgrave, in the now-on famous work "TheTheory of Public Finance", identifies three types ofgovernment actions: macroeconomic interventions,redistributive interventions and microeconomicinterventions.

The first type of interventions is supported in mostcountries of the world from the central budget andconcerns the need to coordinate fiscal and monetarypolicies by the central authority. Here, local authorities can

play only the role of simple agents, which make localfunding in response to the incitation caused by the centralgovernment.

The redistributive interventions, they too, raise funds fromthe central budget, by virtue of the fact that the populationis highly mobile from one local jurisdiction to another.Where, for ethno-linguistic reasons, the mobility of citizensin the territory is low, a local authority can claim the right

12Stigler George, Tenable Range of Functions of LocalGovernment, Federal Expediture Policy for EconomicGrowth and Stability, Joint Economic Commitee,Washington, 1957.

13

Tresch W. Richard, Public finance - A normative theory,Secon Edition, Academic Press, San Diego, 2002, pag.29.

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to practice redistributive policies, funding being made ofthe regional or local budgets.

The last type of intervention, the microeconomic ones,

confer lower rank jurisdictions an important role, based onthe following rules:

the more the quantity and quality of public goodsprovided by the public sector vary from one localauthority to another (utilities are consideredheterogeneous), the more the decision of provisionshould be allocated to higher levels of authority;

the more the effects, positive or negative,generated by a local authority over another higherauthority, the more the production of public goodsshould be ensured by the central government, inorder to achieve the internalization of those effectsand to ensure the optimal level of production;

the higher the possibility to provide novel publicgoods, the more their financing should be madefrom the budgets located at a lower level, thusencouraging innovation and inter-jurisdictionalcooperation.

Wallace E. Oates, in 1972, in "Fiscal federalism" solidifiesthe two principles of Stigler, by proposing the concept of"perfect match", which describes "a government structure,where each jurisdiction determined by the level of supplyof a public good specifically includes a group of individualswho consume that good."14Based on the concept ofperfect correlation, the author has developed the "optimaldecentralization theorem", summed up as: "for a public

good whose consumption area covers more geographicalareas and whose production cost is the same at bothcentrally and locally, it will always be better (or at leastequally effective) to be produced in optimal quantities, ina Paretian sense, locally rather than centrally".15

Charles Adams and Gordon A. Mackenzie, drawing on theexperience of Richard Musgrave, in 1997, in"Intergovernmental Tax Relations: The Chinese System inPerspective ", conclude that "the main guidance inconferring authority as to expenditures is the principle ofbenefit, whereby granting responsibilities for a particularfunction should aim at that particular judicial function to

which the benefits of that function return."16

The theory of fiscal federalism seeks to resolve, as wehave seen, the building of a system of government withmore levels, that should ensure freedom of action ofregional and local communities, but also to allow, thesame time, the long-term conservation of the idea of statein its completeness. This idea was also borrowed for

14Oates E. Wallace, Fiscal federalism, Harcourt BraceJovanovich Inc., New York, 1972, pag.34.

15Oates E. Wallace, Fiscal federalism, Harcourt BraceJovanovich Inc., New York, 1972 pag.35.

16Adams Charles, Mackenzie A. Gordon,Intergovernmental fiscal relations: the Chinese system in

perspective, Working Paper, International MonetaryFund, 1997, pag.6.

unitary states, but it was defined as an essential element"of financial decentralization".

3 Armey Curve

Arthur Laffergraphically implements - Laffer Curve17- theidea expressed since 1776 by Adam Smiththat too hightax rates destroy the basis on which taxation acts, reducetax revenues collected by the state and reduce the taxreturn. Laffer Curve is a chart (Chart 1) showing therelationship between the tax levy rates and the totalincomes of tax levy. According to it, any change in thetaxation rate under the average rate will lead to increasedtax revenues, while surpassing this rate will decrease taxrevenues.

Starting from the idea of Laffer, Dick and Richard Armey,in 1995, released in a similar way the opinion that there isa significant link between the public spending and the

gross domestic product. In reality, there are manyresearchers who attribute this conceptualization toProfessor Gerald Scully, who in 1989 published hisacquisitions on this topic in the article The Size of theState, Economic Growth and the Efficient Utilization of

National Resource, published in the journal Public Choice.

More specifically, they consider that as public expenditurein the gross domestic product growth, the public sector(GDP) expands to a point after which it will compress. It

17"Laffer Curve" was presented for the first time by ArthurLaffer and Laurence H. Meyer in May 1981, in the articleSupply-Side Effects of Economic Policy, published in the

journal of the American Studies Center for Business in St.Louis.

Chart 1.Evolution of the income collected of taxlevies on modifying the average tax rate

(Laffer Curve)

Source: Laffer, A., Meyer Laurence H., Supply-Side Effects of

Economic Policy, Journal of Business Center for American

Studies from St. Louis, 1981

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Eugen DOGARIU

argues that with the fact that the absence of the publicsector causes anarchy (there is no law or, if there is, it isinapplicable, and private property is not guaranteed) andan extremely low level of social welfare. The first sequence

is integrated into the area in which public expendituresare productive and the second one of the two is non-productive. Armey curve is as follows (Chart 2).

As seen from the chart, as the percentage of publicexpenditure in gross domestic product increases, thegross domestic product increases to a point (maximumpoint, the gross domestic product is up - GDPo and publicexpenditure is best - PEo) after which it falls.

Moreover, it is noted that when the share of publicexpenditure in the gross domestic product is 0, the grossdomestic product takes the GDPp value given exclusivelyby the private sector. Consequently, the wider the publicsector (the public expenditure in the gross domesticproduct) is, the higher the social welfare or economic

growth becomes, up to a point where it collapses.

Important research and development of "Armey Curve"have made Philip Grossman in 1997, Johnny Chao andHerbert Grubel, in 1998, Primo Pevcin, in 2004, RoderickHill, in 2008.

Based on these considerations, we believe that we can"restrict" the Armey idea by "fragmenting it" into two parts:

one part corresponding to the central public sector,where public expenditures are "controlled" by thecentral public authorities;

another part corresponding to the local public

sector (local or regional, depending on the state

administrative-territorial organization), in whichpublic expenditures are "controlled" by the lowerlevel public authorities (local or regional).Therefore, the "Revised Armey Curve" is as follows

(Chart 3)

The curve corresponding to the "Local public sector area"is located under the area of the central public sector andthe optimal point (localCo) differs from the optimal pointcorresponding to the central government expenditure,

obtained as the difference between PEo and localPEo. Wecan see four hypothetical situations:

if PEo> localPEo and localPEo 0, then thedegree of local financial autonomy, on theallocation component, is reduced;

if PEo> localPEo and localPEo PEo, then thedegree of local financial autonomy, on theallocation component, is high;

if PEo = localPEo, the local authorities have powersequal to the powers of the central authority, on theallocation component;

if PEo < localPEo, the local authorities have powers

superior to the powers of the central authorities, onthe allocation component.

The first situation is characteristic of the highly centralisedstates, the second situation corresponds to thedecentralized states, while the last two situations arevirtually impossible. We believe that the "Revised ArmeyCurve" presents particular importance to quantify andanalyze the optimal allocation of financial resources oflocal communities. The identification of the optimal pointis achieved when the local gross domestic product is up,and local public expenditure optimal (social welfare oreconomic growth).

Chart 2."Armey" Curve

Source:Armey, D., Armey, R., The Freedom Revolution: The New

RepublicanHouse Majority Leader Tells Why Big

Government Failed, Why Freedom Works,and How We Will

Rebuild America, Washington, D.C., Regnery Publishing

Inc.., 1995

Chart 3."Armey" Curve

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4. The Optimum in Local Public Finance

In accordance with the theoretical foundations of Dick andRichard Armey, in 1995, related to all the theoretical

elements developed in the previous paragraph, which aimat identifying the optimal level of public sector size in theeconomy in relation to the gross domestic product, thisparagraph means to describe the process of quantifyingthe optimum local public expenditure as an equivalentway of measuring the size of the local public sector. Thefunction that supports the empirical approach is below:

G = f (E, A) (3)

where:

G = social welfare represented by the gross domesticproduct per capita;

E = local public expenditure;A = other factors that can influence social welfare.

Therefore, based on graphs 2 and 3, the function thatdescribes the link "Local public expenditure - socialwelfare" can be described using the following type ofnonlinear quadratic equation, with a concave-shapedgraph (A is neglected):

2

321)( xExEGEf ++== (4)

provided that:

0)("


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