ABSTRACT
The United States has always had one of the best-developed systems of fiscal federalism in the world. This chapter begins by comparing actual divisions of responsibility among governments for spending programs with the responsibilities that might be predicted by normative theoretical considerations. The public goods rationale for intervening in a market economy is that certain goods have the physical property that it is difficult or costly to exclude consumers from consumption. There is a federalism dimension to income distribution as well. National trust funds for social insurance programs are neither inevitable nor unavoidable, but they are probably more efficient than state trust funds when the population is mobile. The role of grants and subsidies in a federal system is to take care of those instances where jurisdictions and spending responsibilities cannot be perfectly matched. The basic rationale for categorical grants is benefit spillovers.
