Decentralization in Japanese Local Finance:
A Survey and an Extension of Local Taxes and Local Public Goods

Takero Doi
The Journal of Economic Studies (The University of Tokyo) vol.38, pp.33-44, May 1996.

    Recently we have an animated discussion about the decentralization in Japanese local finance. In this paper, we survey the researches on local public goods, and present the principle of decentralization in future. We obtain the result that a property tax as local taxes should be used positively, and it is necessary to replan the division of local governments.
    First, we investigate how local government can achieve efficient decentralized equilibrium without redistribution of central government.
    Under myopic local government, provision of local public goods with a lump-sum tax is efficient. However, then distribution of population among jurisdiction is not always efficient. When the benefit of local public goods spills over to other regions, she cannot supply them efficiently. In the case of property tax, she oversupplies local public goods. She that taxes interregionally mobile capital accomplishes an inefficiently low level of local public goods provision.
    When the local government reflects on equalization of the utility of individuals among jurisdictions with perfect population mobility, each local authority, levies a lump-sum tax, can supply the optimal level of local public goods. She cannot, however, achieve the optimal distribution of population. In the case of property tax, whether local public goods generate interjurisdictional spillover or not, the decentralized provision of them is efficient, and distribution of population is also efficient. In the case of capital tax, they are inefficiently supplied.
    We review the tax policies of the local government considering equalization of the utility among regions with imperfect population mobility (in models with attachment to home). In the case of lump-sum tax, local public goods provision is not necessarily efficient. This is because she cannot make a strategic transfer to other jurisdiction. In the case of property tax without spillover effect of local public goods, both their provision by each local authority and population distribution are efficient. In contrast, it is not generally satisfied, if there is spillover. The their provision by a capital tax is inefficient.
    Finally, grounding the survey in this paper, we extend the discussion of the decentralization. We conclude that decentralized control of property taxes by the local authority considering interjurisdictional migration is socially efficient. Since local public goods provided by her tax policies is not always efficient, we must replan the division of prefectures or municipalities in order not to generate the spillover if their benefits are spilled over interregionally.

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