A Decentralization Theorem of Taxation

CESifo Economic Studies, Vol. 62, Issue 2, pp. 289-300

Vilen Lipatov,
Alfons J. Weichenrieder
Research Area:
Macro Finance
Mar 2016
fiscal federalism, taxing rights, decentralization theorem

In the European Union (EU), there are longstanding and ongoing pressures toward a tax that is levied on the EU level to substitute for national contributions. We discuss conditions under which such a transition can make sense, starting from what we call a ‘decentralization theorem of taxation’ that is analogous to Oates’ (1972) famous result that in the absence of spillover effects and economies of scale, decentralized public good provision weakly dominates central provision. We then drop assumptions that turn out to be unnecessary for this result. While spillover effects of taxation may call for central rules for taxation, as long as spillover effects do not depend on the intra-regional distribution of the tax burden, decentralized taxation plus tax coordination is found superior to a union-wide tax.

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