Fiscal federalism and the political economy of territorial finance

Authored by: Anwar Shah

Routledge Handbook of Regionalism and Federalism

Print publication date:  May  2013
Online publication date:  July  2013

Print ISBN: 9780415566216
eBook ISBN: 9780203395974
Adobe ISBN: 9781136727627

10.4324/9780203395974.ch7

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Abstract

To date, there have been 28 federal or quasi-federal and 20 decentralized unitary countries with a combined total of about two-thirds of the world’s population. These governance arrangements have led to a resurgence of interest in fiscal federalism principles and practices as federal systems are seen to provide safeguards against the threat of centralized exploitation as well as decentralized opportunistic behaviour while bringing decision making closer to the people. Fiscal federalism principles are concerned with the division of economic powers and the structure and design of intergovernmental finance to secure a common economic union. Each country adapts these principles to suit its political, institutional and cultural characteristics; as a result, each country has a unique structure of economic governance. More often than not, though, politics trumps fiscal federalism principles. This chapter is concerned with four areas of concern: division of taxing powers for sales and resource taxes, fiscal equalization transfers, tax competition, and shared responsibility for fiscal discipline.

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