Starting from scratch? A new approach to subnational public finance

Abstract

The arrangements for lower level governments to finance public goods are complex. Combinations of grant mechanisms and local taxes are often regarded as unfair, opaque or ineffective, and therefore tend to lack legitimacy. This paper explores the design of a new fiscal framework for regional public finance, building from principles rather than an ad hoc political process. It also considers the possibility that a region may choose to leave the federation or union. To offset this possibility, and within certain bounds, our framework allows subnational jurisdictions to decide unilaterally how much tax autonomy and fiscal responsibility they wish to adopt.