The Tax Assignment Problem: Ruminations on How Theory and Practice Depend on History

Abstract

This paper discusses how the theory and the practice of tax assignment-which level of government should tax what, and how-depend on history. It describes the meaning and methods of tax assignment, reviews implications of Musgrave's three-branch view of public finance, notes the importance of accretions to knowledge-of the technology of taxation and of the economic effects of taxation, speculates about how economic evolution affects the conventional wisdom on tax assignment, identifies questionable tax assignments found in various federations that are legacies of history, and emphasizes the danger of assuming "one size fits all" in tax assignment. 1 This wording of the question is adapted from the title of Musgrave (1983). The other pieces of the puzzle of intergovernmental fiscal relations are a) the assignment of expenditure functions; b) the design of intergovernmental grants, which may be needed to compensate for spillovers of costs and benefits between jurisdictions, to offset horizontal fiscal disparities, and to overcome vertical fiscal imbalance; c) the borrowing powers of subnational governments; and d) the institutional framework within which all these issues are addressed. These topics are beyond the scope of this paper. 2 I draw on my earlier work on tax assignment, much of which is not cited; see McLure (1998) and (2000b) and works cited there.

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