An equitable revenue sharing formula for Korean city governments

During the five-millenium history of Korea, 1995 was the first time mayors and governors were elected by local residents, instead of being appointed by the central government. This could be the starting point of fiscal decentralization in this country, and, whether intended or not, this has the potential of enhancing allocational efficiency through the realization of local preference in the provision of local public services. Hence, this research aims to review and analyze the indigenous characteristics of the current local public finance system from the view point of the western normative theory, and develop a more equitable revenue sharing formulas to support Korean new fiscal decentralization. Since this is one of the first attempts to examine the evolving local autonomy squarely using the lens of normative theory of intergovernmental relations, its results could make a great contribution to the theory of local public finance in Korea. This research has developed two conceptual frameworks for the new revenue sharing formulas, and presented their aid simulations. The first model is the economic activity model, which tries to measure economic income of residents by measuring the level of economic activity in each jurisdiction. This model improves on the existing system, because it could motivate local governments to utilize the flexible tax rate system, and measure non-tax revenue as well. The other one is the expenditure need model, which measures the expenditure needs beyond local control in the form of expenditure need index. By controlling for expenditure needs beyond local control in the revenue sharing formula, mayors and governors could fairly compete with each other to provide better services with less cost. Unfortunately, lack of relevant data as well as service quality measures have confined this research to develop aid formulas for only garbage/road services instead of for overall local public services of city governments. This research finds that the fiscal capacity measure derived from the economic activity model and the expenditure needs indices from the expenditure need model are highly consistent with the reality of Korean city governments. Moreover, aid simulations for garbage/road services using the revenue sharing formula in this dissertation would result in a very different distribution of aid than the present formula. With the development of relevant data of service quality for local services, this approach could be a foundation for the new general revenue sharing formulas to support fiscal decentralization in Korea