Merits of Fiscal Federalism in US and China - Example

Fiscal Federalism Part Medicaid Grant History of Medicaid development Medicaid relates to a joint and federal health program that assists low-income citizens and families in paying for long-term medical and custodial expenditures. The program acts as a government insurance initiative that ensures all American citizens, which low income gain access to medical services. Each state within United States remains responsible for managing Medicaid program with the authority to determine eligibility to the initiative. United States government created Medicaid program in 1965 using provisions within Social Security Act (Smith and Moore 1). At enactment into law, government intended that Medicaid program would provide health coverage for pregnant women, needy children, disabled persons, and the elderly population. In 1967, amendments to the program ensured incorporation of Diagnostic and treatment plan for children below the age of 21 years old. In 1981, the government made further amendments that helped in initiation of waivers that enabled Medicaid beneficiaries to have freedom of choice and community based care. The amendment enabled patients under Medicaid program to have flexibility in choosing their preferred health care providers. Medicaid program become functional in all States in 1892, 18 years after its initiation. It is important to note that Arizona become the last state to establish Medicaid program. Medicaid program has since evolved with inclusion of various services including dental care insurance and introduction of Medicaid drug rebate program. In 2000, the government initiated an Act that allows uninsured women suffering from breast cancer to receive medical cover under Medicaid even if they do not meet income standards. The diagram below indicates development of Medicaid from 1965 to 2010 based on financial aid. It is indispensable to note that Medicaid program have diversified with inclusion of other health care aids and increased spending. How Medicaid program works It is imperative to understand that Medicaid remains as an entitlement program with ability to support health coverage for all citizens within a state. Once an individual meets the eligibility criteria, the state has authority to grant him or her medical coverage. However, the state that has power to manage Medicaid must also meet eligibility criteria that would enable it to receive funding from federal government (Ramanathan and Dutta 133). Medicaid do not deliver health care services to patients directly but covers costs incurred by nursing homes, physicians, and hospitals. It is imperious to note that approximately two-thirds of Medicaid expenditures covers acute-care services for the beneficiaries. Other expenditures of about 30 percent covers costs related to long-term care services and nursing home for patients under Medicaid program. The figure below shows the distribution of Medicaid spending and population of potential benefits. Evidently, the disabled American citizens receives more health care aid than the rest of eligible beneficiaries. Does Medicaid program address interjurisdictional externality problem? Interjurisdictional externality problems relates benefits and costs of local government services an goods mainly to residents that live within other political jurisdictions. The interjurisdictional externalities normally results into problems that derails efficient federal system operation. Creation of problems within the federal system operations results due to spilling over of benefits and costs to other geographic locations of political jurisdictions (Auerbach et al. 212). It is imperative to comprehend that intergovernmental grant including Medicaid remains as the most vital federal policy for addressing interjurisdictional externalities mostly at local government levels. Therefore, Medicaid program remained influential in addressing interjurisdictional externalities problems that may arise due to state spill over. Interjurisdictional externalities problems remains addressed due to common services offered by health care system granted by Medicaid to all citizens within the states. In addition, government funding of the Medicaid program ensures elimination of unnecessary spillovers or benefits to other states having varied political jurisdiction mainly due to similarity within provisions of the program. The figure below explains the concept of economic externalities with the red line showing negative externality mainly due to societal associated costs relative to the free market point at P0 and Q0. Spillovers forms an excellent example of the negative externality. Purple line indicates the actual summation of costs paid for the health care aid for instance. Is there rationale to believe that Medicaid program exhibits fly paper effect? Flypaper effects refers to situations where intergovernmental grants significantly increases public spending to a higher level than increment in local income mainly at equivalent sizes. It is imperative to understand that money normally sticks mainly due to ability of exogenous grants to increase public spending compared to equivalent citizen income. Due to flypaper effect, most grants remains within control of government as individual income remains amongst them. Therefore, federal government grants have the ability to raise local government expenditure largely than equivalent increase of its local income. Medicaid program as an intergovernmental grant directly increases local community income. Increased income of local community members relates to improved public spending and addition of more public goods. Consequently, the Medicaid grants aids in increasing availability and flow of public finances, services and goods resulting into flypaper effect. In addition, evidence of flypaper effect within the local government due to Medicaid grant relates to observed consumption of public goods. Consumption of public goods increases due to the additional amounts of grant that government uses to purchase additional goods. Moreover, incidences of reduced taxation remains as evidence for flypaper effect mainly due to Medicaid grant. The amount of money gained from Medicaid grant by the local state can directly find use in reduction of local taxes giving opportunity for increased consumption of private goods. Such cases of Medicaid grants assist in tax relief and consequently, the aid substitutes locally raised revenues. Substitution of locally raised revenues is imperative in increasing available public finance flow and consumption of goods. The aforementioned rationales depicts evidences of how Medicaid program can exhibit flypaper effect to local economies. Part II Economic Rationale for optimal level of Fiscal decentralization The most conceivable economic rationale for optimization participation of the local, state, and federal governments in fiscal decentralization would involve development of financial responsibility (Slack 14). It is important to understand that financial responsibility remains the most fundamental component of decentralization mainly due to its ability to contribute in economic status of the decentralized State or local government. An efficiently developed urge for financial responsibility amongst the stakeholders of fiscal decentralization would enable collection of adequate finances that otherwise support the established economies. Besides raising economy of a decentralized state, the developed financial responsibility would optimize fiscal decentralization by improving abilities to make independent decisions. In addition, financial responsibility enables for independence in making decisions over expenditures and other public economic activities. Therefore, a rationally developed financial responsibility amongst citizens would be imperative in optimization of fiscal decentralization. Based on analysis are we over or under centralized With adoption of financial responsibility, States and local governments distances themselves from federal policies and control. The state and local governments gain the opportunity to make decisions relating to expenditures and revenue collection mainly because they have financial responsibility. Therefore, ‘we’ would remain under centralized under the aforementioned analysis due to less involvement by the federal government and ability to make independent expenditures on other economic activities including infrastructure construction. Explanation of how argument applies in the above case The best conceivable rationale for applicability of financial responsibility remains its ability to increase fiscal autonomy of the local or State government. With improved economic responsibility, the decentralized government has authority to make independent decisions regarding expenditures and consequently experiences minimized federal influence (Lin 10). Political interests that may prevent attaining the idea Attainment of financial responsibility may not become a reality due to greed and corruption envisaged by certain politicians. Politicians who aims at misappropriation of public finances would completely prevent attainment of fiscal decentralization through invention of financial responsibility. It is imperious for local and State governments to eliminate politicians with corruption minds to help mitigate uncertainties that may prevent attainment of decentralization through financial responsibility. Part III Differences between fiscal federalism in US and China While China exists as a unitary state, Unites States remains a federal government with varied independent States. The unitary system of China governance have a main central government and subsidiary provinces as opposed to US with federal government and States. China as a developing country has experienced change in its governance policies that aims at decentralization. On the contrary, United States that had established a decentralized system consisting of various independent states have started initiating policies and practices that aims at minimizing dependency of states and other local sectors on federal government (Garnaut et al. 53). In United States with fiscal federalism system, there exists substantial autonomy granted to subnational governments in conducting both expenditures and tax sections of the budget. In addition, the subnational government authorities in US have ability to conduct revenue collection and provision of infrastructure and social services. Consequently, US local governments and States have the substantial fiscal autonomy. Substantial fiscal autonomy enables State and local governments to design their own tax collection structures if they do not go against federal constitution. On the contrary, China federal system grants central government the authority to set laws and policies taxation and revenue collection. The central government of China exclusively takes responsibilities related to taxation governance and policies formulation. It is essential to understand that unlike China with monotonous tax collection agency that remains as the central government, US states experiences freedom in setting user charges, tax bases and rates even without approval by the federal government. In addition, the fifty-one states in US have authority to source for finances if they do not violate federal financial policies. It is imperious to understand that the ability of US States to have independent tax collection agencies hugely contributes to a more decentralized American government than China. Therefore, the subnational governments in China have comparatively lower legal, formal, or independence for data relating to tax systems. Therefore, the Central government of China have complete authority over tax related issues and amount of revenue allocation authority to provinces. Fiscal system between US and China United States China Similarities between fiscal federalism in US and China Both China and USA possess non-transparent intergovernmental transfer systems. It is indispensable to understand that greater percentage of American grant system remains distributed through an ad hoc basis in a similar way as in China. In addition, there exists large disparities within the subnational units of fiscal capacity in both China and America. In both the countries, the middle level government have the sole responsibility of making decisions relating to expenditures, revenue collection and distribution to local governments. Most importantly, both the countries have their middle-level governments that prides in a variety of choices. It is essential to note that China remains along the path that leads to increased fiscal decentralization while the United States practices re-centralization. America had originally practiced decentralization for a longer time before China begun adopting it. Merits of Fiscal federalism in US and China Fiscal decentralization remains imperative in enhancing revenue mobilization. It is imperative to note that certain types of taxes requires that their collection to involve familiarization with local population and economy. For instance, decentralization has enabled Unites States to collect revenue from property taxation mainly because they remain closer to the taxpayers. Besides enhancing collection of certain taxes including property taxation, decentralization remains vital in making tax administration more efficient. When government remains closer to the taxpayers, they have easier task of implementing tax policies mainly due to involvement of society members in decision-making. Such efficiency in tax administration has assisted United States in collecting taxes. In addition, adoption of decentralization also assisted Chinese government in administration of tax policies within the local communities. Such efficiency in tax administration remained a possibility due to familiarity of government policies with the local citizens. Fiscal decentralization has been essential in political and economic success in both China and United States. Decentralization leads to more participation of citizens in the government due to its proximity and ability to contribute to decision-making. Consequently, decentralization increases political and economic participation mainly because the citizens remains part of the aforementioned processes. Work Cited Auerbach, Alan J. et al. Handbook of Public Economics. London: Newnes, 2013. Print. Garnaut, Ross et al. China: The Next Twenty Years of Reform and Development. Canberra: ANU E Press, 2010. Print. Lin, Tingjin. The Politics of Financing Education in China. London: Palgrave Macmillan, 2013. Print. Ramanathan, Chathapuram S., and Subhabrata Dutta. Governance, Development, and Social Work. London: Routledge, 2013. Print. Slack, Naomi Enid. Guide to Municipal Finance. New York: UN-HABITAT, 2009. Print. Smith, David G., and Judith D. Moore. Medicaid Politics and Policy. Transaction Publishers, 2011. Print. Read More