A Decentralization Theorem of Taxation
SAFE Working Paper No. 105
19 Pages Posted: 20 May 2015
Date Written: May 2015
In the EU there are longstanding and ongoing pressures towards 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 spill-over 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 results. While spill-over effects of taxation may call for central rules for taxation, as long as spill-over 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.
Keywords: fiscal federalism, taxing rights, decentralization theorem
JEL Classification: H21, H77
Suggested Citation: Suggested Citation