the degree to which an area utilizes its tax resources.
Fiscal Effort Details
Typically, the word 'fiscal' implies the government's involvement in some economic issue, and fiscal effort is no different. This article will go in-depth regarding what fiscal effort is, how it pertains to government funding and why it is important to the conduct of governments.
All governments hold precedence over individual households, towns, states, or provinces, depending on their size. The government uses the financial resources of its subsidiaries to enact policies and create change, whether that be through the passing of new laws or the construction of new infrastructure. Fiscal effort refers to a government's ability to raise tax resources from a specific area.
However, fiscal effort does not track the amount of tax resource that the government could extract, as this is more so the definition of another term, fiscal capacity. Rather, fiscal effort refers to the rate at which the government taxes this specific area and how much of the maximum tax resource the government currently utilizes. A high fiscal effort is usually emblematic of a high tax rate, while a low fiscal effort represents a lower tax rate.
Real-World Example of Fiscal Effort
This effect can be seen at play when comparing the fiscal effort for education in states like Florida and Iowa. Despite having access to lesser financial resources, a study examining fiscal effort by Cohen and Orland found that states such as Florida and Iowa maintained fairly high education spending compared to the US average.
It's important to note that governments can only use fiscal effort to examine and compare the tax burden on two regions within the same jurisdiction. Only then can the funding distribution be properly compared. Comparing fiscal effort between different governments of different countries usually provides no value, as different governments tend to have varying spending levels. As a result, a fiscal effort that would be absurdly high for a smaller government with fewer citizens to manage could be perfectly average for a much larger government.
Fiscal Effort Significance
Since different areas have varying levels of wealth and subsequently varying fiscal capacity (maximum taxable amounts), fiscal effort is a meaningful way to compare different regions through a relative lens. By looking at a fiscal effort, governments can identify which places can potentially be subject to further tax burden while also analyzing how heavily areas, on average, are taxed under the government's jurisdiction. Fiscal effort can also be examined alongside fiscal capacity to determine region demographics. For example, a lower fiscal effort in a higher-income region can yield an equal amount of tax revenue to a higher fiscal effort in a lower-income region.
Typically, governments that impose a higher fiscal effort do so for a good reason. In the case of governments that need to access a specific tax quota per region, taxing at a higher rate can allow an area with less income per capita to meet the threshold demanded in terms of tax by other regions.
More realistically, however, one will find a low tax effort in these areas due to an inability to shoulder a higher tax burden, especially as the income per capita continues decreasing. At other times, the government may implement a higher average fiscal effort to help increase spending, whether in public services such as subways and buses or other sectors such as healthcare and education. An area that is subject to a lower fiscal effort due to low income can be targeted for further government spending, allowing the residents to attain a better quality of life while increasing the area's fiscal capacity for government use.