ABSTRACT
This chapter considers all several of the systems and how each of the systems can be designed to optimize efficiency and equity across a decentralized fiscal system. It explores the basic economic concepts of fiscal decentralization from the three perspectives of revenue policy, expenditure policy, and intergovernmental grant policy. Fiscal federalism is the study of the financial relationships between multiple levels of government. In the United States, this commonly is considered to be the relationship between the federal, state, and local governments, with each level of government having specific rights and obligations. Taxes that seem to be the most appropriate for regional governments include income, destination-based consumption, natural resources, and user fees. Economic theory can help illuminate when and where a specific characteristic of a grant is most useful and appropriate. Lump-sum grants from the central government to decentralized jurisdictions generally are the preferred approach for creating equalization across fiscally diverse jurisdictions.
