Delegation of Taxation Authority and Multipolicy Commitment in a Decentralized Leadership Model

Abstract

This article examines to what extent taxation authority should be delegated to local or lower-level government. Delegation of taxation authority can be regarded as a commitment to the local tax rate ex ante in a decentralized leadership model, in which local governments set policies ex ante and the central government decides transfer policies ex post. Previous papers point out that ex post interregional transfers of the central government distort ex ante regional policies of local governments. However, Silva clarify the case where efficient expenditure by local governments is achieved. This article examines the delegation of taxation authority by extending Silva’s model to include commitment to taxation and generally derives the conditions when efficient public expenditure by local governments can be achieved in relation to the delegation of taxation authority. The model adopted in this article allows various levels of spillovers of local public goods and various types of multipolicy commitments of taxation and/or expenditure.