The Evolution of Local Public Finance without Fiscal Equalization: Evidence from Local Government Historical Statistics in Japan from 1887 to 1935

Mitihito Ando, Rikkyo University
Masato Furuichi, Teikyo University
Masato Miyazaki, Saitama University

One of the essential roles of fiscal equalization is to mitigate fiscal disparities among local governments that arises from local economic inequality and resulting disparity in local revenue capacity. On the other hand, how local economic inequality led to local fiscal disparities before fiscal equalization schemes were introduced is not well studied in many developed countries. By utilizing newly-corrected historical fiscal records of Japanese local governments, this paper investigates the historical development of modern local public finance under no fiscal-equalization system. Contrary to previous studies that either focused on specific local municipalities as historical case studies or used aggregated time-series statistics, we construct long-term panel dataset of local public finance and study its long run evolution in pre-war Japan from 1887 to 1935. Our tentative results show that fiscal disparities in local expenditure (especially expenditure on compulsory education) and local revenue (especially revenue from household tax) decreased since 1887 while regional income inequality during this time increased. This result suggests that poorer municipalities in pre-war Japan levied heavier taxes on local residents to secure certain local expenditure levels, rather than spending less for them. Our interpretation of this result is that local public expenditure in that time was strongly controlled by the national government and local governments did not have sufficient discretion in determining local spending levels. That is, more equal expenditure levels were realized by heavier tax burdens in poor regions.

No extended abstract or paper available

 Presented in Session 154. Public Finance in the Local Context