Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 10: Normative versus positive theories of revenue assignments in federations
This chapter is organized around a number of questions. First, how are local governments financed around the world, and in particular what is the role of local taxation in this financing? Second, what has economic theory to say about this allocation, both on normative and positive grounds? In particular, can it explain what we observe? Third, which are the practical important issues that one should consider in designing a local tax system? For example, given the presence of increasing administrative costs for decentralization, how could one use the existing national taxes to create room for local tax autonomy? And how should tax enforcement powers be allocated across levels of government? A simple list of open problems may be of great help in understanding the issues involved in designing a local tax system. The references at the end of the chapter offer a guide to the more specialized literature. Even in this more limited framework, there are several issues that we can just touch on in the chapter. First, there is, or there should be, an obvious link between a local tax system and the expenditure which this tax system is supposed to finance. Both the level and the characteristics of the local expenditure should enter as variables in the equation concerning the determination of the optimal local tax system (see, for example, Gordon 1983). We recognize this problem, but do not investigate it to a great extent.
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