Tax Assignment and Recent Technological Advances

This paper begins with a summary of the general consensus among public sector economists regarding subnational tax assignment. We then examine how technological advances in a rapidly evolving and increasingly digital economy are altering the capacity of subnational governments to effectively impose some of their traditional broad-based taxes and discuss some major structural reforms that might facilitate continuing to raise revenues using these tax instruments. These economic changes are more likely to affect larger cities and more developed countries than lower-income cities and countries that often rely on simpler revenue structures. Nevertheless, the impacts of these technological changes will be felt across the world over time, and national and subnational governments in lower-income countries will eventually experience the same issues with their tax instruments as more developed jurisdictions. In any case, these economic changes will require many difficult policy decisions both within individual governments and in governmental interactions to yield workable subnational tax structures, given the increasingly digital nature of economic activity and the impacts of ever-changing technologies. Moreover, the accelerating pace of change creates pressures on governments to adapt more quickly than in the past Ð a potentially difficult task, given that history indicates that revenue sources are typically changed very infrequently.