Basic Report

Cooperation between central and local governments is an important issue in intergovernmental relationship. Recently, a variety of policies have been promoted to encourage autonomy and accountability of local governments. However, central government still have most of power over the authority and responsibility for local finances while local governments have relatively weak control over them. Under these background, this study investigated ways to build a more cooperative and decentralized intergovernmental relationship in Korea. In particular, we focused on allocation of function, distribution of tax sources, and fiscal adjustment among central-regional-local governments. The main results are as follows.
   First, in terms of allocation of function, the criteria of tasks to be performed between different levels of government are not clearly defined in relevant laws. As a result, regional and local governments handle the tasks that the central government should take in the form of joint work. Moreover, the expenditure budget of local governments is relatively larger and shows faster growth rate than that of regional governments. However, since much of the expenditure budget comes from central and regional government subsidies, local governments have been shown to be overly functional compared with own tax sources. Therefore, there is a need to reconsider delegation of tasks to local governments, using subsidies, especially in the field of social welfare.
   Second, in terms of distribution of tax sources, as of 2018, the share of tax revenue between central-regional-local governments was 77.5:15.5:7.0. In particular, the tax revenues of regional governments are more than twice of that of local governments, with higher growth rates. Considering the current allocation of function, it is necessary to review the system for distribution of tax sources and fiscal adjustment between regional governments and local governments. Moreover, under the principles of taxation, universality, extensibility and stability, and sufficiency of national and local taxes were examined. In the case of universality, consumption tax and income tax show high universality among national taxes while local consumption tax and vehicle tax show high universality among local taxes. In terms of extensibility and stability, income tax and value added tax show high extensibility and stability among national taxes while property tax and regional development tax show high extensibility and stability among local taxes. Lastly, regarded with sufficiency, income tax and corporative tax are high among national taxes while acquisition tax and local income tax show high sufficiency among local taxes.
   Third, in terms of distribution of fiscal adjustment, we focus on subsidy rates for national subsidies and regional subsidies. In the case of national subsidies, they were allocated more to regional governments than local government. However, a significant of national subsidies were provided with subsidy rates below those required by law. Regional subsidies also showed similar issue with national subsidies. In order to address this problem, some tasks, which are prescribed in law but are not performed by local governments need to be removed from the law.
   Lastly, we proposed suggestions for improving fiscal relationship between central-regional-local governments. In terms of allocation of function, the role of governments at different levels and powers of local governments need to be more clearly defined in law. In addition, new organization, which coordinates agreements and allocation of function between central-regional-local governments, may be needed to promote cooperative relationship. In terms of distribution of tax sources, in order to increase the tax revenues of local governments, we proposed exchanging the tax sources between local governments and regional governments. we suggested that tax sources with a large variation in revenues by region should be exchanged with tax sources with little variation. Moreover, we mentioned that local consumption tax, which holds with high universality and extensibility can be operated as shared tax between local governments and regional governments. Finally, in terms of distribution of fiscal adjustment, we proposed several alternatives to reform the subsidy rates for national subsidies, particularly emphasizing that the principle of fiscal adjustment between central-local government in social welfare area should be reasonably revised.