Handbook of Multilevel Finance
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Handbook of Multilevel Finance

Edited by Ehtisham Ahmad and Giorgio Brosio

This Handbook explores and explains new developments in the “second generation” theory of public finance, in which benevolent rulers and governments have been replaced by personally motivated politicians and the associated institutions. Following a comprehensive introduction by the editors, the renowned contributors present fresh and original perspectives on the key multi-level issues, along with recent developments in theory and practice, as they relate to taxes, budget systems, the management of liabilities and macroeconomic stability. The book also explores special issues concerning the poor and marginalized, structural change and the environment, natural disasters, and the task of overcoming conflicts whilst keeping countries together.
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Chapter 10: Normative versus positive theories of revenue assignments in federations

Flavia Ambrosanio and Massimo Bordignon


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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