Decentralization of government seems to be one of the intellectual darlings of public finance in the 1990s, just as direct consumption-based taxation in its various guises (e.g., the expenditure tax, the tax on consumed income, the flat tax, the X-tax, and the simplified alternative tax) was the darling of the 1980s. More important, many countries are considering decentralization—or have actually embarked on a policy of decentralization. The question of tax assignment—which level of government should tax what in a decentralized system—is an important aspect of the literature of fiscal decentralization. Unfortunately, some of those responsible for decentralization policy, especially in less developed countries (LDCs) and countries in transition from socialism, are not always thinking clearly about issues of tax assignment and are not taking due cognizance of international experience. At best they may make choices that are sub-optimal; at worst, they run the risk of repeating mistakes other countries have made—mistakes transition countries and LDCs can ill afford to make. These risks are aggravated by the fact that the literature is always not clear on some issues.
This chapter is an attempt to place some warning signs along the route to decentralization. 1 These are especially important for transition countries and LDCs: they generally have the most difficulty finding revenue sources that are suitable for use by subnational governments and they can least afford to waste resources on administration of, and compliance with, needlessly complicated laws. The topics discussed may appear to be somewhat of a ‘grab-bag, ’ and much of what is said here can be found in the literature, in any event. But the topics were chosen deliberately; all have arisen in at least one country that is considering (or implementing) decentralization.
Because the paper discusses revenue sharing and debt finance, as well as tax finance, its title refers to revenue assignment, instead of tax assignment. While there is no detailed consideration of intergovernmental grants, their