chapter
FISCAL FEDERALISM
Pages 9

The financing of a government which functions at different levels, for example, national, state and city.

At each level there is a different capacity for making expenditure decisions, varying abilities to raise taxes and different claims, and to receive grants from other levels of government. The neatest form of fiscal federalism is where each level of government has specific functions and finances them itself from its own tax base. A scheme could be that the national government is responsible for defence, social security, foreign affairs and health, and receives the revenue from an income tax to pay for them. At the state level there could be responsibility for transport and industrial policy, with a corporation tax to finance this. At the city level, police and education are provided and financed by a sales tax.