The Generation of Income and the Expenditure Within a State
Division of Income: Revenue Sharing Revenue sharing means that a specific government body has the authority to tax a community and collect revenue; then to distribute this revenue, according to a formula, amongst various levels of government either horizontally or vertically. Sharing takes place in order to lessen fiscal inequality – one province, town or suburb receiving much less than another.
Public income = Total revenue of all government institutions from all sources
One should remember that within one country, like South Africa, there are communities that are very wealthy, with a high standard of living. Within the same country we may also find communities who are struggling to provide even essential services simply because the authorities do not enjoy the same revenue potential from their citizens. Revenue sharing attempts to lessen this inequality. There are certain formulae for sharing of revenue from taxation.
There are also specific laws with regard to provincial and local governments and their taxing authority:
Vertical Revenue Sharing Once again it is almost impossible for the central government to overcome or eradicate externalities completely. Although one level of government may tax a community, the revenue might be spent on another lower level, say at local government level, for the provision of essential or important services. The central government may issue grants to local or provincial powers in order to lessen the effect of vertical inequalities in financial prosperity and, therefore, capacity. Although this inequality, as we have said before, can seldom be eliminated altogether, the central government issues these grants to lessen the effects of this inequality. This is done so that local or provincial government bodies may be able to provide similar basic services to their communities. • This is a sharing of revenue between the various government levels within one state – i.e. central, provincial or regional and local;
• Tax may be imposed at one level and spent on another level; • Good intergovernmental relations are essential here; • VRS place to lessen externalities (p.14) and inequalities; • Financial grants from the central government to regional and local governments are an effort to reduce vertical inequalities.
Horizontal Revenue Sharing It is very difficult to ignore the effect of externalities or spill-over effects between communities (page 14). It is therefore essential that sharing of revenue takes place so that government bodies can cope with various factors such as pollution, vehicle transportation and the provision of other services which communities see as important or essential. • This is sharing of revenue between government authorities on the same level and it may be achieved by distribution of the tax base, as between two different municipalities, often in the same metropolitan area such as with Somerset West and Durbanville. Or Soweto and Johannesburg, for instance;
• This is very important in a metropolitan area where externalities play an important role, as with motor vehicle transportation, pollution and city planning.
Inter-Governmental Grants These are issued by higher authorities to lessen the effect of financial inequalities between communities that differ greatly in financial prosperity and capacity. In particular, local authorities in rural areas often have less revenue to provide services. Grants from a higher authority become an essential source of income. In many cases corruption prevents the proper distribution of these grants.
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