ABSTRACT
While most countries decentralize significant expenditure responsibilities to lower-level jurisdictions, this is accompanied by very different degrees of revenue-raising responsibilities. The case for decentralizing revenue-raising responsibilities is a mixed one (Boadway 2000). On the one hand, accountability arguments suggest that lower-level governments ought to be responsible for raising significant amounts of their own revenues, including all revenues at the margin. On the other hand, there are significant possibilities for inefficiencies and inequities arising from decentralized taxes. To the extent that resources are mobile across jurisdictions, there will be an incentive to set tax rates too low to attract resources from other jurisdictions. If all jurisdictions behave this way, the result will be self-defeating. Moreover, there are sound reasons for having some imbalance in expenditures and own-source revenues – so-called Vertical Fiscal Imbalances.1
