Possibilities for reallocation of corporate income tax to local government budgets
2014
Pule, B., BA School of Business and Finance, Riga (Latvia) | Leibus, I., Latvia Univ. of Agriculture, Jelgava (Latvia)
The achievement of budgetary independence is essential for the increase of financial stability of local governments. Insufficiency of sources of revenue to cover the expenditure of local governments and their dependency on the state aid leads local governments to become financially unstable. To diversify the sources of budgetary revenue for local governments, it might be efficient to increase local government budgets with revenues from the taxes where local governments themselves are interested to increase the tax base. It may be ensured by corporate income tax (CIT) which is directly related with the business performance result not indirectly as it is in case of personal income tax (PIT). Therefore, the authors suggest including part of the CIT revenues into local government budgets. It is recommended to compensate the decrease of the state budget with the PIT revenue for the non-transferred part of CIT to avoid the reduction of either the state general budget or the local government general budget caused by the reallocation, thus, proportionally decreasing the share of PIT which is transferred to the budgets of local governments. The research includes the calculation of the most appropriate tax reallocation proportion and the analysis of possible benefits and losses of local governments due to such tax reallocation between the state and local government budgets.
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