Shared Tax Sources in a Leviathan Model of Federalism

Abstract

Separation of the tax sources is often advanced as a norm for the fiscal organization of a federal system of government. This article examines the analytical properties of the separation norm within the context of the Leviathan model of revenue-maximizing government. If two revenue-maximizing units of government at different levels in a federal system share a common tax base, combined tax rates applied to that base will lie on the backward-bending portion of the Laffer curve. A challenge of sorts is presented to the Brennan-Buchanan hypothesis that a federal as opposed to a unitary system of government can act as a constraint on Leviathan. They base their proposition on the existence of competing governments at a single level. However, the essence of federalism is multiple levels of government. This layering needs to be more carefully considered with respect to the implications for restraining Leviathan.