NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Optimal Taxation Approach to Fiscal Federalism

Roger H. Gordon

NBER Working Paper No. 1004
Issued in October 1982
NBER Program(s):   PE

In a Federal system of government, each unit of government decides independently how much of each type of public good to provide, and what types of taxes, and which tax rates, to use in funding the public goods. In this paper we explore what types of problems can arise from this decentralized form of decision-making. In particular, we describe systematically the types of externalities that one unit of government can create for nonresidents, through both its public goods decisions and its taxation decisions. The paper also explores briefly what the central government might do to lessen the costs of decentralized decision-making.

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Published: Gordon, Roger H. "An Optimal Taxation Approach to Fiscal Federalism." Quarterly Journal of Economics, Vol. 98, No. 4, Nov. 1983, pp. 567-586.

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