Any approach to tax evasion, in terms of thinking and legal practice, is necessarily long and complex if we consider that its purpose is the notion of vague and permeable outlines. Such a study should be firstly as comprehensive as possible in order not to overlook anything that might be useful for decoding the concept and its architecture, and on the other hand, it must be synthetic, in order to capture the essential characteristics and the mechanism of the concept. For us, in our approach we tried to integrate the concept in the concept "fiscal phenomenon" and to direct our effort to decipher the steps traveled in combating tax evasion in Romania.tax evasion, market economy, public finances

Alia Gabriela DUTA

English

Research Papers in Economics

168                                                                        Finance – Challenges of the Future 
 
TAX FEDERALIZATION – AN IMPORTANT STEP IN THE 
PROCESS OF DECENTRALIZATION 
 
Assoc. Prof. Narcis Eduard MITU, PhD. 
Nicoleta Mihaela DRĂCEA, PhD Student 
University of Craiova 
 
1. Introduction 
 
Improving efficiency and 
modernizing the public administration 
was and still is a major requirement of 
the Romanian society’s reform. 
One of the essential principles 
which form the basis of the functioning of 
the local administration – principle 
stipulated in the European Charter of 
Local Self-Government – is, without 
doubt, the principle of subsidiary, 
principle that governs all civilized 
countries and which states that adopting 
decisions is done by the authority that is 
closest to the citizen. Therefore, the 
financial decentralization represents one 
of the major priorities of the Romanian 
administration reform. 
In accordance with art. 120 
paragraph 1 of the Romanian 
Constitution, republished: ”The public 
administration from the administrative-
territorial units is based on the principles 
of decentralization, of self-government 
and of the deconcentration of public 
services”. The public administration 
authorities, by means of which local 
autonomy is achieved in communes and 
towns, are the local councils and town 
halls chosen within the provisions of the 
law (art. 121, paragraph 1). At the same 
time, the fundamental law acknowledges 
the Council as being “the public 
administration authority that co-ordinates 
the activities of all commune and town 
councils” (art. 122, paragraph 1) 
Therefore, decentralization in 
public administration is a legal system  
 
where the local problem solving is no 
longer done by clerks named by the 
centre, but by the ones chosen by the 
electorate. 
In case of decentralization, the 
state does not assume all alone the 
burden of administrating, but it shares it, 
in certain proportions, with other 
categories of persons such as local 
authorities. The decentralized system 
replaces the hierarchical power – proper 
to centralization – with a legal 
administrative control.   
As a consequence, the concept 
of decentralization has a broad and a 
narrow acceptance. In its broader 
acceptance, decentralization represents 
any transfer of power form a central to a 
local level. In its narrow acceptance, 
decentralization is linked to the process 
of achieving it, i.e. territorial 
decentralization – by transfer of power to 
the administrative-territorial units, and 
services decentralization – by separating 
some public services from central or local 
jurisdiction and offering them an 
autonomous organization. 
The blueprint act of 
decentralization no. 195/22 May
1, defines 
decentralization as: the process of 
dispersing administrative and financial 
competences from the central public 
administration level to the local public 
administration or the private sector 
levels.  
 
 
                                                           
1 Appeared in the Official Journal, no. 453/25 May. 
2006. Year VIII, No. 10/2009                                                                                                169 
2. Faces of the decentralization 
 
After responsibility transfer, 
decentralization is divided into three 
categories: political, administrative and 
fiscal. 
Political Decentralization implies 
offering to the citizens a greater power in 
which concerns the decision making, 
especially by using democratic 
processes. 
The success of the Political 
Decentralization depends on a series of 
key components such as: constitutional 
or statutory reforms, the existence of the 
political pluralism, the enforcement of the 
legislative bodies and the local political 
units. Usually, political decentralization 
determines the emergence and 
development of many administrative 
tasks in the public sector. 
Administrative Decentralization is 
recognizing the legal personality of the 
administrative-territorial units, the 
existence of public authorities that 
represent them and that are not part of 
an hierarchical system subordinated to 
the centre, as well as the dispersal of 
some of the public services from the 
central authorities to the local ones. 
The different sub-categories of 
the administrative decentralization are 
frequently defined according to the types 
of institutions or agencies to which the 
responsibilities are transferred.  
-  Deconcentration  represents the 
weakest form of decentralization that 
implies the transfer of authority and 
responsibilities from the Ministry and 
Agencies to their corresponding territorial 
structures. 
-  Devolution  generates a higher 
autonomy level and implies the transfer 
of responsibilities from the central 
government level to inferior levels that 
have been empowered by means of 
constitutional or statutory provisions.   
-  Delegation  implies the 
responsibilities transfer from the central 
agencies to quasi-autonomous entities, 
working independently or semi-
independently from the government.  
-  Privatization sometimes is seen as 
a form of decentralization (one projected 
in such a way that higher performances 
regarding the efficiency of the market 
style could be generated by higher levels 
of autonomy and higher flexibility in 
decision making) and implies the transfer 
of responsibilities from the government to 
private entities. In what concerns 
privatization, responsibilities can be 
transferred even to the services suppliers 
themselves.   
The degree of administrative 
decentralization depends on the number 
of public services given to the local 
jurisdiction. The greater their number, the 
higher will be the degree of 
decentralization.  
The national economic policy 
should provide that the local authorities 
should have their own adequate financial 
resources of which they could dispose 
freely within their competences.   A real 
reform of the local administration cannot 
be resumed just at dispersing 
responsibilities to the local authorities. 
The transfer of tasks to local authorities 
without providing the necessary funds 
can affect directly the process of 
decentralization. The local authorities’ 
financial resources must be proportionate 
to the competences under the 
Constitution or under other laws. 
We cannot speak about a true 
decentralization without a more serious 
approach of the fiscal (federalization) 
decentralizing segment that has to 
ensure the necessary financial resources 
for the performance of the administrative 
decisions of the administration. 
 
3. Fiscal Federalism 
 
Fiscal Federalism refers to the 
structure of the financial-tax relations 
existing in a country between the central 
administration level and the one of local 
administration.   170                                                                        Finance – Challenges of the Future 
Many of the scholars’ studies 
focus on the nature of the inter-
governmental transfers and on the 
differences concerning the capacity of 
generating revenues of the different 
types of authorities.  
This way, fiscal federalization 
refers to the power transfer for mobilizing 
and attracting monetary resources, and 
spending public money from the central 
governmental authorities to the local, 
provincial, regional, county, municipal or 
parochial (parish)  governmental 
authorities etc.
2  
As originally developed by 
Musgrave (1959)
3   and Oates (1972)
4, 
the “theory of fiscal federalism” concerns 
the division of public-sector functions and 
finances in a logical way among multiple 
layers of government. 
Fiscal federalism is concerned 
with "understanding which functions and 
instruments are best centralized and 
which are best placed in the sphere of 
decentralized levels of government"
5 
An important aspect in analyzing 
the fiscal federalism is represented by a 
corresponding balance between the 
authority and the necessary financial 
resources in order to exercise that 
authority.   
The vast literature also raises 
aspects concerning about 
“decentralization theorem” (Oates 
1991)
6, models for the assignment of 
                                                           
                                                          
2 Gallagher, Mark. 1998 – Choices in Fiscal 
Federalism, Center for Applied Studies in 
Economics, CASE STUDY NO. 98/1, September. 
3 Musgrave, Richard A.  1959 - The Theory of 
Public Finance. New York: McGraw Hill. 
4 Oates, Wallace E.  1972 - Fiscal Federalism. New 
York: Harcourt Brace Jovanovich. 
5 Oates, Wallace E. 1999 – An Essay on Fiscal 
federalism, Journal of economic Literature, 
37(3):1120-49  
6 Oates, Wallace E. 1991 -  The Theory of Fiscal 
Federalism: Revenue and Expenditure Issues—A 
Survey of Recent Theoretical and Empirical 
Research,  Public Finance with Several Levels of 
Government, edited by Remy Prud’homme. The 
Hague/Koeningstein: Foundation Journal of Public 
Finance. 
powers (McLure 1993)
7, discussions of 
intergovernmental spillovers
8 and 
intergovernmental grants (Break 1980)
  9, 
fiscal mobility and migration (Wildasin 
1991)
  10, and vertical fiscal imbalance 
and dependence
11  (Hunter 1977)
 12. 
In other words, it is the study of 
how competencies (expenditure side) 
and fiscal instruments (revenue side) are 
allocated across different (vertical) layers 
of the administration. 
To summarize, the basic 
elements of the fiscal federalism are:  
-  Dispersing the public services 
responsibilities from the central 
administration to towards the local public 
authorities; 
-  Empowering the local government 
to collect revenues from its own 
resources to finance these services. 
In some countries, financial 
decentralization is motivated by the 
desire for a macro-economical stability 
and economic growth. In the case of the 
countries members of the OCDE, the 
financial federalism is sustained by 
arguing based on the practical reality 
according to which central governments 
are not able to properly respond to an 
increasing requirement for goods and 
public services. This argument is also 
sustained by Oates’
13 optimal 
decentralization theorem that grounds 
that a public good whose consumption 
 
7 McLure, Charles E., Jr. 1993 - Vertical Fiscal 
Imbalance and the Assignment of Taxing Powers in 
Australia. Stanford: Hoover Institution. 
8  The spillover effect supposes almost automatic 
transition from one state of integration to another, 
the sectorial integration aiming for a general 
integration. 
9 Break, George F. 1980 - Financing Government in 
a Federal System. Washington, D.C.: The 
Brookings Institution. 
10 Wildasin, David E.  1991 - Income Redistribution 
in a Common Labor Market, American Economic 
Review 81/1991: 757–74. 
11 The process of deepening, vertical development 
(institutional) . 
12 Hunter, J.S.H. 1977 - Federalism and Fiscal 
Balance. Canberra: Australian National University 
Press. 
13 Oates, Wallace E.  1972 - Fiscal Federalism. 
New York: Harcourt Brace Jovanovich. Year VIII, No. 10/2009                                                                                                171 
spreads in areas of several local 
communities and whose production cost 
is the same both at central and local 
levels  will always be easier to be 
produced in optimal amounts, in a 
parentian sense, locally than centrally.  
Both responsibility and allocative 
efficiency can be improved by 
transferring the distribution of costs 
closer to the income sources and 
therefore closer to the taxpayer. 
  Until now, in Romania, three 
stages
14 can be identified within the 
process of implementation of the fiscal 
federalization (decentralization).  The first 
stage (1991-1994) is characterized by 
important changes in the structure and 
financing of the local authorities, which 
also included the introduction of the local 
tax and contributions system. During the 
second stage (1998 – 2001) new steps 
were made in order to achieve 
administrative and financial 
decentralization. This way, on the 
grounds of the new legal provisions 
concerning the finances of the local 
authorities, not only the GDP on local 
budgets,  but also the corresponding 
proportion of local expenditure in total 
public expenditure has increased (for 
example, between 1998-2001, the GDP 
percentage increased from 3.6 to 6.5% 
and the local expenditure  increased from 
14.4 to 26.6%). During the third cycle 
(2001 – present), the normative acts 
adopted established new rules for certain 
functions of the local authorities, 
especially concerning the services and 
utilities in the local sub-ordination.    
  The process of fiscal 
federalization is still ongoing, some of its 
“failures” being demanded by the local 
communities and, at this time, they 
should be solved as urgent as possible. 
Among these, we can identify mainly:  
                                                           
14 Profiroiu, Alina; Profiroiu, Marius şi Pradeilles, 
Ane-Azam, 2006, Consideraţii privind procesul de 
descentralizare în România, Revista Administraţie 
şi Management public, nr. 7, pg. 34. 
 
-  Lack of predictability of the 
revenues of the local communities; 
- Modifications of some categories 
of costs of the local administration, 
without a proper insurance of the 
resources (the social protection issue, 
investments in education and public 
health, ensuring public order) ; 
-  A high degree of dependence on 
the annual laws of the state budget 
-  The impossibility to control certain 
local taxes or contributions which are 
very important for the local budget, 
shares of the income tax included;    
-  The incapacity of the local 
economies to generate tax revenues 
sufficient enough as to cover the public 
necessities. Most taxes with an increased 
rate of collection are taken to the state 
budget, and local communities are set 
taxes and contributions that presuppose 
relatively small tax returns; 
-  Although they finance certain 
activities, the local public authorities do 
not have competences regarding the 
naming or the dismissal of the leaders of 
these institutions; 
Local governments have no real 
leverage to influence taxpayers to ensure 
the opportunity and the complete 
payment of local taxes etc. 
 
4. Conclusions 
 
A developing community is a 
community that relies more and more on 
its own decisions and resources that it 
manages, and less and less on the 
outside help.  
If the decisions and the 
managing of the resources are not done 
within the community, the latter will 
become dependent. It will depend on 
institutions and organisms which it, the 
community, controls more or less directly.  
Institutions that are not directly 
controlled by the citizen are less 
transparent institutions, thus less 
efficient. Therefore, expressions like “the 
government’s money…”, “the district’s 
money…” or “the money from the city 172                                                                        Finance – Challenges of the Future 
hall…” are easily and often used. But one 
essential thing has been forgotten. This 
money belongs to the citizen; he is the 
one who finances the budgets of the 
administrative institutions, he is the one 
who generates the resources of the 
community. Unfortunately, at this time, 
only a small amount of this money
remains within the community from 
where it left. 
Hence, we embrace the opinion 
according to which the local community 
itself must manage the resources, the 
values and the mechanisms of a good 
functioning.  That is why there is a need 
for a tax federalization. 
 
 
 
 
REFERENCES 
Break, G. F.  Financing Government in a Federal System. Washington, D.C.: The 
Brookings Institution, 1980; 
Gallagher, M.  Choices in Fiscal Federalism, Center for Applied Studies in 
Economics, CASE STUDY NO. 98/1, September 1998; 
Hunter, J.S.H.  Federalism and Fiscal Balance. Canberra: Australian National 
University Press 1977; 
McLure, Ch. E., Jr  Vertical Fiscal Imbalance and the Assignment of Taxing Powers in 
Australia. Stanford: Hoover Institution, 1993; 
Musgrave, R. A.  The Theory of Public Finance. New York: McGraw Hill, 1959; 
Oates, W. E.    Fiscal Federalism. New York: Harcourt Brace Jovanovich, 1972; 
Oates, W. E.    The Theory of Fiscal Federalism: Revenue and Expenditure Issues—
A Survey of Recent Theoretical and Empirical Research,  Public 
Finance with Several Levels of Government, edited by Remy 
Prud’homme. The Hague/Koeningstein: Foundation Journal of Public 
Finance, 1991; 
Oates, W. E.    An Essay on Fiscal federalism, Journal of economic Literature, 
37(3):1120-49, 1999; 
Profiroiu, A.; 
Profiroiu, M. şi 
Pradeilles, A. 
Consideraţii privind procesul de descentralizare în România, Revista 
Administraţie şi Management public, nr. 7, 2006. 
 

Combating tax evasion: between goals and achievements

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