‘‘Which Tax’’ or ‘‘Which Tax for What?’’: Tax Assignment in the Theory of Fiscal Federalism

Abstract

What is the power of traditional and competitive theories of fiscal federalism in explaining tax assignment at a local level? This article deals with this issue, arguing that both theories fail to properly explain the practice of tax assignment across countries. The author shows that the inapplicability of local benefit taxes makes the theory of tax assignment both under- and overdetermined in the framework of the traditional theory where the public sector is a benevolent player. The author also shows that the politicians’ misconduct that is emphasized by competitive theories of fiscal federalism would lead toward earmarking local taxes, if the aim is to enforce responsibility, a feature that is not widely observed in practice. It is therefore argued that alternative lines of research must be addressed to rationalize the practice of tax assignment.