Theory of Public Finance in a Federal State

Theory of Public Finance in a Federal State

Theory of Public Finance in a Federal State

Theory of Public Finance in a Federal State


This book gives a new answer to the old question about the optimal degree of fiscal decentralization in a federal state. It shows that fiscal decentralization is a method to disclose the preferences of currently living and future generations for local public goods, to limit the size of the government, and to avoid excessive public debt finance. While the allocative branch of the government benefits from fiscal decentralization, it is difficult to obtain a distribution of incomes that differs from the outcome that the market brings along.


Active tax competition, in short, tends to produce either a generally low level of state-local tax effort or a state-local tax structure with strong regressive features.

George Break (1967)

The mobility of individual economic units among different localities places fairly narrow limits on the capacity for local income redistribution.

Wallace Oates (1977)

Policies that promote residential mobility and increase the knowledge of the consumer-voter will improve the allocation of government expenditures in the same sense that mobility among jobs and knowledge relevant to the location of industry and labor improve the allocation of private resources.

Charles Tiebout (1956)

If jurisdictions compete with each other and taxpayers/consumers are able to vote with their feet, there may be fairly strong pressures for subnational governments to respond to the wishes of the electorate.

Charles Mc Lure, Jr. (1986)

1.1 Assignment of Government Functions and Mobility

1.1.1 Assignment of Government Functions

Issues of public finance appear in a new light when an economy is divided into several regions. If a state consists of many jurisdictions, the question arises of how to assign the various government activities to different governmental levels. The general functions of the government-to support an efficient allocation of scarce resources (where the private sector fails to do so) and to guarantee a fair income distribution-must first be divided into several components. Once a fundamental line of government policy is chosen, these functions must be assigned to the jurisdictions. However, such an assignment cannot be made once and for all; it critically depends on the economic environment that characterizes the federal state.

A substantial increase in interregional mobility, which we can observe today in many federal states, changes the economic environment in an important . . .

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