ABSTRACT
Fiscal coordination between governmental units on different levels is commonly termed vertical coordination. Horizontal coordination connects units at the same level of sovereignty, as with understandings among cities, interstate compacts, and fiscal treaties among nations. The tax credit tends to distort the allocation of resources by making imposition of the tax by a subordinate unit appear costless to its taxpayers, or at least a bargain. If it is unwilling to grant a tax credit, the superior jurisdiction may go part way by allowing its taxpayers to subtract the subordinate jurisdiction's tax in computing their taxable incomes. Horizontal fiscal coordination developed later and more slowly than vertical coordination. Now, with the growth of common markets and free trade areas and the increased flow of international capital, horizontal coordination is increasing in speed and changing in form. The chief tools in horizontal tax coordination are the unilateral tax credit or tax deduction, the tax treaty, and tax harmonization.
