43 Such a restriction would also have the additional benefits of preventing abuse by over-taxing exporting firms as well as reducing the possibility of corruption and evasion.

Other possible problems might also be obviated by careful tax design. For example, the danger of tax exporting and, more importantly, ‘beggar-my-neighbor’ tax competition suggest that, as with some other subnational taxes on business such as property taxes, it may be advisable to place a floor (and perhaps also a ceiling) on such taxes as well as requiring that the same uniform rate should be imposed on all types of business. Similarly, compliance and administrative costs could be kept low by imposing the tax on the basis of information available on existing business income tax returns. The tax base for individual regions and localities might be determined on the basis of payroll data, which in many countries is already collected for purposes of social security and payroll taxation.

Although there is considerable experience around the world with variants of this sort of tax (Bird 2003), as yet the relative unfamiliarity of this idea appears to have discouraged its use in many countries at least until recently.<sup>86</sup> Most countries thus remain stuck with essentially presumptive forms of business levy. However, even these levies may often be improved by better design and implementation in order to improve their elasticity and to reduce both their distorting effects and their vulnerability to abuse (Bird and Wallace 2004). Many recent studies have highlighted the barriers to the growth of micro and small enterprises that may be created by badly designed and implemented systems of local business taxation (World Bank 2007). The potential solution offered by the BVT to this problem and to local government revenue problems, particularly in large and expanding urban areas, appears to deserve more detailed examination in many emerging countries.

# **7. Conclusion**

The intergovernmental fiscal arrangements in any country must be thought of as a _system._ The pieces of the system have to fit together properly if decentralization is to work properly. One cannot develop a good subnational tax system without having first established clear and logical expenditure assignments to the different levels of government. Similarly, given political realities, one cannot in most countries decentralize significant revenues to subnational governments without having in place an intergovernmental transfer system to offset at least some of the disequalizing effects that would otherwise occur. Nor does it make sense to think of decentralizing exactly the same package of tax choices to all subnational governments regardless of their scale and scope of operations.<sup>87</sup> There is much to be considered before determining an effective system of subnational taxation for any country. Nonetheless, one clear lesson from this review of the literature is that both theory and experience suggest strongly that for fiscal

> 86 South Africa recently considered such a tax but has not yet decided to adopt it.  However, Italy (Bordnignon, Gianni, and Panteghini 2000) and more recently Japan do have such taxes in place.  Such a tax was recently proposed by a recent official commission on local business taxation in France (Fouquet 2004). More limited forms of taxes along these lines may also be found in Hungary and in a few U.S. states, notably Michigan (McIntyre and Pomp 2009).

> 87 For example, on the special problems of metropolitan areas see Slack (2007) and Rojas, Cuadrado-Roura and Fernandez Guell (2008).

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