An objective is overall tax neutrality to avoid movements of the tax base into neighbouring jurisdictions, but also to ensure that depressed regions do not lag too far behind the rest of the country.
The economic principle behind this delegation of fiscal right is that because the assumption of differences in preferences between regions it is more efficient for provision of public services to be decentralised.
Because the risk of competition between regions could upset the economic stability of the entire polity, policies that in some cases could acceptably or even efficiently be administered at local levels are taken over by the centre.
Such is the nature of local public services; naturally when there is more wealth and increased tax revenue, voters will opt for improved services at higher expense.
Initially, North and South have equal levels of unemployment and identical tax rates on income. In fact, fiscal federalism is a general normative framework for assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions  InGovernor of Rivers State of Nigeria, Ezenwo Nyesom Wike said that he believes true fiscal federalism will "strengthen the economy of his country as all sections will develop based on their comparative advantages".
Suppose a federal state, A, has two regions, North and South. Within this, responsibility for macroeconomic stabilisation remains with the central government. About this resource This Economics essay was submitted to us by a student in order to help you with your studies.
Application differs because unitary and federal governments differ in their political and legislative context and thus provide different opportunities for fiscal decentralization. Each of us is qualified to a high level in our area of expertise, and we can write you a fully researched, fully referenced complete original answer to your essay question.
There are two primary types of transfers, conditional and unconditional. This applies as much within countries as within the EU, where shocks to regions or localised fiscal indiscipline may be ignored, making coordinated fiscal policy a challenge.
An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower levels of government. The central moral hazards are twofold. Chanchal Kumar Sharma  clarifies that while "fiscal federalism constitutes a set of guiding principles, a guiding concept" that helps in designing financial relations between the national and subnational levels of the government, "fiscal decentralization on the other hand is a process of applying such principles".
More specifically, from an economic perspective there is a degree of fiscal federalism in every layer of governance within an economic unit such as a state.
This applies but within a fiscally federal country as much as within the EU; tax competition can undermine the economies of associated regions, so some oversight of their fiscal policies is necessary to prevent this sort of destructive activity.
The central government has - or at least should have - say over macroeconomic stabilisation and other public goods such as defence or other non-local public goods, but the provinces are more likely to be able to provide efficient output than uniform service provision from the centre.
This example demonstrates that where there is factor mobility, the risk of tax or spending competition is destructive and unsustainable. As a subfield of public economicsfiscal federalism is concerned with "understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government" Oates, Jump to navigation Jump to search For the use of the term fiscal federalism as applied to Scotland, see Full fiscal autonomy for Scotland.
An example of this would be the Canada Health Transfer. An unconditional grant is usually a cash or tax point transfer, with no spending instructions. If unemployment benefit is raised, the rate of taxation on income must also be raised to pay for it.
Regions within a state have a fairly limited ability to respond to external shocks - and rightly so: In the second period, rich voters will move from North to South, and will meet the unemployed or poor coming the other way.
This may be noted that the concept of fiscal federalism is relevant for all kinds of government: However, allowing regions to administer the policy themselves would generate the risk of imbalances between regions.
In other words, it is the study of how competencies expenditure side and fiscal instruments revenue side are allocated across different vertical layers of the administration.
However let us suppose that in the first period, the local government of the North, unannounced, decides that it prefers more social spending. Regions on the whole do not concern themselves with how their actions might affect their neighbouring localities FINDand this can be extended to the whole economy, meaning that pro-cyclical tendencies will be across the board and the reverse of the endeavours of central government for smoothed business cycles.
It is not entirely their fault however, since it is likely, as stated above, that the policies with which they are entrusted are likely to be those which are to be called for when there is a tax surplus.Weingast, B.R.
(), Second Generation Fiscal Federalism: Implications of fiscal incentives, Journal of Urban Economics, 65(3), Module 2 The demand for local public goods and services and. Journal of Economic Literature Vol. XXXVII (September ) pp. – Oates: An Essay on Fiscal Federalism An Essay on Fiscal Federalism WALLACE E.
OATES1 1. He has published over refereed journal articles on topics as diverse as the determination of government expenditure and economic challenges facing nations are frequently common, 2 Previous papers focussing on the economics of fiscal federalism for Scotland include Bell and Christie () and Darby, Muscatelli, and Roy ().
Fiscal Federalism [Wallace E. Oates] on killarney10mile.com *FREE* shipping on qualifying offers. This reprinted edition of a classic and truly seminal book, written by one of the leading thinkers in the field.
Wallace E. Oates (March 21, – October 30, ) was a Distinguished University Professor of Economics at the University of Maryland.
He taught in the fields of public economics and environmental economics, and was considered a major international figure in both fields.
His first book was Fiscal Federalism () and he authored numerous. Wallace Oates. American Economic Review (May, ), 71, pp Reprinted in T.
Tietenberg, ed., Environmental Instruments and Institutions (Edward Elgar, ) "Community Composition and the Provision of Local Public Goods: A Normative Analysis" "An Essay on Fiscal Federalism" Wallace Oates.
Journal of Economic Literature .Download