Question

Some localities have the choice of how their local income or sales tax is to be administered-that is, whether it will be administered along with the state tax, by a local government, or by a private company. What factors matter in making the choice? Which option would you advise, and why?

Answer 1

The factors that can play a part in deciding who administers the local tax are:-

1) The size of the locality and whether it makes sense to have a separate structure to levy and collect taxes

2) The taxation regime of the local government vis-a-vis the state government

3) Potential tax revenue to be generated by the local population

4) Policies such as welfare schemes of the local government and the state government and their funding sources and their financial state

Definitely, a decentralized tax regime would be better as that would ensure that the taxation regime is more aligned with the local realities such as the income level, the inflation conditions and the standard of living currently prevailing and aspired by the population. If the resources are adequate to support a decentralized taxation structure, then that is a preferable option.