Tax Assignment: Does the Practice Match the Theory?

The goal in this paper is to build on the existing literature to better explain the tax assignment choices made by countries in different economic circumstances. In particular, we explain why tax assignment to subnational governments is five times greater in industrial than developing countries, even when adjustment is made for differences in income level. Following on from the theory of tax assignment, we consider four arguments for this disparity. First, electoral regimes are not in place for the accountability gains to be captured. Second, tax decentralization may result in unacceptable fiscal disparities, and third, tax administration costs are higher for subnational governments and there is not enough incentive to take steps to lower them. Finally, we find empirical evidence to reject the hypothesis that giving more discretionary powers to subnational governments in developing countries will lead to a crowding out of central revenues, but find the opposite in the case of industrial countries.