ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Asymmetric Policy Compliance to Incentive Plan of Local Shared Tax System：Tax Collection Efforts versus Cost－cutting Efforts

  • Sun-Moon Jung Seoul National University
  • Hyorim Kim Korea Institute of Public Finance

Asian Tax Journal Vol. 22 No. 2 (2021), pp. 187-217

Abstract

The purpose of this study is to explore potential reasons of policy ineffentiveness of the incentive system of the general revenue sharing (GRS) for local governments. In this study, we expect that there would be a significant incentive effect on costs cutting activities, over which local governments possess a wide range of discretion. On the contrary, we predict a weaker effect of incentives on tax collection activities, since local governments have limited appropriations rights for tax revenue. The sample consists of 455 municipal－year observations during the 2016～2018 from 155 municipal governments who receive shared revenues from the central government and are available with incentive data on Local Finance Integrated Open System. Empirical results show that the penalty based on cost－cutting efforts in the previous year is negatively associated with the penalty in the current year. This suggests that penalty treatment has a significant incentive effect, leading to local governments exert higher efforts to avoid further punishment in the future. On the other hand, we do not find a noticeable effect of the penalty on tax collection activities on the subsequent penalty. Combined, these findings support that incentive plan has a significant effort－inducing effect on cost cutting activities only, over which local governments have a wide range of discretion. The current study contributes to the literature on the incentive plan of GRS, which has provided only an inconclusive evidence on effort－inducing effect of the incentive plan. This study provides a potential cause of policy ineffectiveness by focusing on local governments limited discretion to alter performance indicators in tax collection. We also throw implications to policy makers. Our findings suggest that incentive plan on tax collection activities may not realize its purpose, given that the local governments have limited authority on revenue expansion.

Keywords

  • general revenue sharing(GRS)
  • incentive system
  • revenue expansion
  • cost－cutting

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Asian Tax Journal

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