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If it is assumed that the objective of regional big business is to maximize its after-tax income then this desire could be satisfied by regional authorities both through regional tax rate modification and tax privileges offer as well as through choosing another qualitative level of tax administration. Under the condition of loose control exerted over tax liabilities exposure, the risk of tax breach exposure is lowered, which secures after-tax income growth attained by tax dodging. Mild attitude towards tax dodgers, permitting long-term tax arrears allows to decrease actual tax burden for some taxpayers. Non-cash budget execution tools (mutual offsets of budget and taxpayers’ liabilities) can also reduce tax liabilities assumed by taxpayers to the State. Besides, intensive usage of these tools might be important for regional officials logrolling with taxpayers and budget funds recipients as well as with intermediaries practicing transfer pricing, which results in corresponding budget losses and gains of intermediaries and corrupted officials.

Budget execution form either bank or treasury is also of great significance. It is essential for a bank lobby that budget execution method secures an important client for he could gain a lot by operating the bank accounts of the latter. And it’s significant for budget recipients that stricter control over budget funds expenditure be attained by treasury execution.

Budgetary outstanding credit debt accumulation mechanism as a mean of covering some budget expenditures allows to increase the amount of social services offered to the population (at least for a short period of time). But enterprises giving to the state a credit on goods and services provide against such policy.

Therefore, the institutional factors of budget policy, which exert an influence upon the efficiency of the latter, come to determine the level of the electorate support for the regional authorities owing to diverse regional groups’ interest in this or that form of budget structure or budget execution. Consequently, it is necessary that regional institutional factors be regarded while choosing economic or social policy for the region.

Alongside with that the dynamic process of choosing the economic policy by the regional authorities can lead to structural changes in the groups supporting the authorities. From the point of view of both efficiency and effectiveness in budget social expenditures the development of target support institutions for the population groups in need comes to be of vital importance. Therefore, such development comes to be essential for the population interests but it can be provided against by enterprises offering public and transport services on the condition that service prices are subsidized by the state (under the categorial social subsidies system).

In the same way budget expenditure efficiency largely depends upon the reformation degree of some budget recipient sectors such as public health service, education, or culture, etc. But social institution reformation within a short period of time might stir up public opposition, especially if the institutions providing target support fail to satisfy all the requirements. Besides, budget recipient reformation arouses the employees’ opposition.

On the one hand strict attitude revealed by the authorities towards tax debt enterprises stirs up counteractions initiated by the enterprises and their staff but on the other hand it allows increasing public goods provision level by budget income growth.

Causing corruption decrease and various intermediaries income diminution the reduction in non-cash budget execution forms deprives regional authoriries of the support provided by corresponding groups but allows of budget revenue increase and public goods supply.

The same situation occurs when provision of some public goods is financed through the accumulation of outstanding budgetary liabilities. Such tool allows of budget debts to enterprises offering services to the budget and public organizations as well as of budget debts to regional officials and public employees. The reduction in budget debts attained by cuts in financing of public health service, education and culture without any reforms carried out in order to increase expenditure efficiency results in diminution of public support for the regional authorities. But debt growth stirs up public employees’ opposition as well as counteractions of the enterprises offering goods and services to the state and having natural monopoly over electricity, heating, and water supply to the state authorities and public organizations.

c) Fiscal policy and relations between the Federal Center and the regions. The state power represented by executive authorities and to a less extent by legislative authorities can exert a profound influence upon the level of public support for the regional authorities. It might be attained by a series of tools from a mere publicly declared support for a certain candidate for the Governor post at the coming elections up to the additional financial aid to the region by setting federal expenditure programs for the region, offering budget credits and granting extensions of credit repayment.

So as Federal center support could be available, the regional authorities should pursue their policy considering the Federal authorities’ interests. The Federal Center interests can be divided into two groups. The first group comprises interests based upon regional political support for the Federal Center. These interests are not connected with economic policy pursued in the region and include, for example, voting in the Federal Council (The upper Chamber of the Russian Parliament) for a draft law lobbied by the federal executive authorities, launching a campaign for representing federal authorities’ interests at parliamentary or president elections4, or averting mass discontent with federal authorities manifested through protest against economic policy pursued, against public wage debts etc. The second group comprises the Federal Center interests in regional economic policy, inclusive of minimization of federal tax debts, the observance of legislation requirements (such as securing the inter-regional unlimited mobility of goods, the development of housing reform, absence of consumer price subsidies, etc.) and federal budget legislation requirements (such as execution of budget deficit value restrictions as well as the restrictions in budget debt imposed on federation subject, extra-budgetary funds absence, non-cash budget execution forms rejection).

It must be assumed that some regional leaders do not rely upon the Federal Center support and approval. If a leader takes priority over his rivals manifested through public support, he can be quite independent in policy setting according to existing constitutional structure in Russia (exclusive of present political reform based on Federal power increase and regional power decrease). More than that, the leader’s opposition to the Federal Center might encourage the regional electorate support growth. Consequently, the growing influence exerted upon the regional electorate can result in gaining independence of the Federal Center by the regional authorities and vice versa. Alongside with that the policy pursued by the Federal authorities in order to increase the support for the governor might lower both the electorate and the officials welfare as well as well-being of the special groups representatives.

The description of general model for
the regional authorities fiscal behavior

According to the assumptions mentioned above we can arrive at the conclusion that the regional leader’s behavior is determined by a complicated system of interrelated factors being of vital importance to the regional policy. In this article we make an attempt at formal simplified presentation of the problem. It should be noted that our description is of a preliminary character and the model described will be developed in order to define the conditions and features shaping the model functions determinant for the regional leader’s decisions on both budget funds expenditures and tax collection. But now it is necessary that we undertake a practical task of shaping the interbudgetary equalization mechanism, which could force the regional leader to intensify tax accumulation and budget expenditures on public goods provision on the basis of his powers. Within the framework of the model development our description will add to the general model for regional authorities’ fiscal behavior. Therefore, besides a preliminary description of general model for the regional authorities’ behavior, this section comprises a description of methods for setting practical model based on further made calculations and empirical analysis of corresponding hypotheses. The factors regarded in the abstract within a simplified model in order to outline its applicability area and forecasting opportunities could be exposed through the description of the general model for the regional authorities’ behavior.

Assume the possibility of maintenance the regional leader’s present position be raised along with growing satisfaction expressed by the groups mentioned above, whose interests are closely connected with the regional leader’s interests. It means that we are aimed at defining the regional leader’s utility function increasing in each of its arguments, which comprise objective function value of the electorate, special interests groups, regional and federal officials and the Federal Center. In order to simplify the problem it might be assumed that each group exerts a direct influence upon the leader’s position and the leader’s effect with the groups is also direct. Besides, it should be assumed that each utility function of the groups be independent from the other functions. In a word the regional leader maximizes the objective function as

W (V (•), P (•), S (•), F (•)) ( 1)

Where V (•) – indirect utility function value of representative household (the choice in favor of representative but not median voter will be justified further);

P (•) – indirect utility function value of the special interests group (the choice of such form of objective function is commented below);

S (•) – indirect utility function value of the administration officials;

F (•) – a function value describing the Federal Center estimation of the regional leader’s activity.

The variables, which are determinant for functions V (•), P (•), S (•), F (•), objective functions of the economic agents described above as well as tool variables chosen by the agents are given below.

It is assumed that function W is increasing in each of its arguments V, P, S, F.

Regional leader’s budget constraint go as follows:

E + Z + B = T + Tr, ( 2)

where E – regional budget expenditure for regional public goods provision;

T – own tax revenues (received from different kinds of taxes given below)

Z – payments for administration officials and bureaucrats;B – welfare payments amount (pensions, subsidies, students’ grants and scholarships, budget officials’ salary exclusive of the officials considered in function S argument, and monetary allowances)

Tr – federal financial aid received by the regions from the federal budget

It should be noted that usually in the intergovernmental grants analysis the utility function of an average regional citizen (either median voter or representative consumer) is considered as objective function5. In some simple cases (for example in the model described in the next section) the objective function can be substituted for by individual preferences within a model with median voter, whose preferences determine the level of public and private goods provision. But it is possible that some difficulties in selecting a median voter preferences within the model be caused by the expenditure structure, budget execution technique, special interest groups structure (inclusive of some regional officials) variables included in the model besides federal expenditure amount and private goods production level (taxation level).

There is nothing unusual that different groups’ interests be considered in the regional leader’s utility function. For example, E.Juravskaya6 assumes the leader’s (mayor’s) objective function be dependent upon such variables as the level of public goods provision, the level of private business regulation by the authorities, and budget revenue amount used by the leader for personal purposes, which reflect the interests of many more others than local electorate.

Now let’s analyze indirect utility function V (•). Representative household utility function U (•) could better serve the purpose of formalizing the regional population interests rather than median voter utility function7. The problem of median voter utility function regarded as the main function determining regional leader’s behavior is caused by difficulties in linear ordering of the alternatives assumed. Even in a very simplified model the electorate preferences might be determined not only by expenditure amount on public goods provision but also by total tax share paid by the voter, terms of pension and allowance payments (if he is entitled to receive those), or public salary payments. And if linear alternative ordering could be regarded as impossible then the very notion of median voter as well as any analogy might not exist.

Expenditures for public goods provision along with after tax wages and allowances could be considered as a variable responsible for alternatives but then the question, whether the preferences of all participants of the voting process will be single-humped relative to linear ordered alternatives, remains unsolved as the utility function with its argument calculated this way might not be quasiconcave.

The question, whether the median voter in the region is an allowance and salary recipient, is still open and the answer to this question may depend upon the characteristic features of the region and vary in different periods of time. Generally speaking tax changes as well as budget grant changes may draw the median elector from one group to another8.

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