article 09-mclure - national tax journal

The Tax Assignment Problem

339

National Tax JournalVol. LIV, No. 2

Abstract - This paper discusses how the theory and the practice oftax assignment—which level of government should tax what, andhow—depend on history. It describes the meaning and methods oftax assignment, reviews implications of Musgrave’s three–branchview of public finance, notes the importance of accretions to knowl-edge—of the technology of taxation and of the economic effects oftaxation, speculates about how economic evolution affects the con-ventional wisdom on tax assignment, identifies questionable taxassignments found in various federations that are legacies of his-tory, and emphasizes the danger of assuming “one size fits all” intax assignment.

INTRODUCTION

One of the most important questions of intergovernmen-tal fiscal relations is “who (which level of government)

should tax what?”1 This is sometimes called the “tax assign-ment problem.” In this paper I reflect on how both the theoryand the practice of tax assignment depend on history. Thepaper presents “ruminations;” it is not meant to be a system-atic discussion of tax assignment.2

One way to formulate the tax assignment problem is toask how space travelers landing on Mars would assign taxes.Implicit in this formulation is an assumption that fiscal his-tory on Mars (but not the non–fiscal features of its economy)starts when the spaceship lands and taxes are assigned. Whilethis may be a useful starting point for a normative analysis—determining optimal tax assignment—it does not helpmuch to understand why tax assignment is what it is or howit might change in the future, as economic conditions or the

Charles E. McLure,Jr.The Hoover Institution,Stanford University,Stanford, CA 94305-6010

The Tax Assignment Problem:Ruminations on How Theory and

Practice Depend on History

1 This wording of the question is adapted from the title of Musgrave (1983).The other pieces of the puzzle of intergovernmental fiscal relations are a)the assignment of expenditure functions; b) the design of intergovernmen-tal grants, which may be needed to compensate for spillovers of costs andbenefits between jurisdictions, to offset horizontal fiscal disparities, and toovercome vertical fiscal imbalance; c) the borrowing powers of subnationalgovernments; and d) the institutional framework within which all theseissues are addressed. These topics are beyond the scope of this paper.

2 I draw on my earlier work on tax assignment, much of which is not cited;see McLure (1998) and (2000b) and works cited there.

NATIONAL TAX JOURNAL

340

state of knowledge changes. A more use-ful paradigm for that purpose might askhow benevolent Martian fiscal expertslanding on earth at various points in timewould suggest assigning taxes, assumingthat they want to help maximize the wel-fare of the Earthlings living in the particu-lar nation where they land.

This formulation would force us to askseveral important questions, includingthese: When the Martians arrive, whatkind of economy do they find? Do theyland in a developed country, a less–devel-oped country (LDC), or a country in tran-sition from socialism (CIT)? What is therelative importance of primary products,manufacturing, and services? Are valu-able natural resources geographically con-centrated? How well developed are inter-state and international markets in goodsand services? How well developed is thecapital market? Do the Internet and elec-tronic commerce exist? What is the stateof knowledge about the technology oftaxation and the economic effects of taxa-tion? What is the capacity for tax admin-istration (at the various levels of govern-ment) and compliance? How inclined aretaxpayers to pay the taxes they owe “vol-untarily?” What is the geographic land-scape? Are the Earthlings concernedabout resource allocation? About incomeredistribution? About macroeconomic sta-

bilization? What expenditure functionsare assigned to various levels of govern-ment?3

This paper addresses these questionsand some of the many subsidiary ques-tions they raise. It takes as given a federalsystem with three levels of governmentand concentrates primarily on the assign-ment of taxes between the top and sec-ond–tier levels, which for expositionalconvenience are called the federal andstate levels (except when discussing taxassignment in a particular country); thethird level is called “local” and the bot-tom two tiers together are called“subnational.”4 On occasion the paperdiscusses fiscal relations within the Euro-pean Union (EU); although the EU is nota federation, it raises interesting questionsof fiscal federalism.

The next section discusses the meaningand methods of tax assignment, issuesthat are not addressed adequately in mostdiscussions of the topic. Subsequent sec-tions review some of the implications ofMusgrave’s three–branch view of publicfinance, discuss the importance of accre-tions to knowledge—of the technology oftaxation and of the economic effects oftaxation, suggest how economic evolutionaffects the conventional wisdom on taxassignment, and indicate how some of thetax assignments found in various federa-

3 This question assumes implicitly that the number of levels of government and the boundaries of varioussubnational jurisdictions are predetermined and fixed; see the next paragraph of the text. As noted in thediscussion of the role of geography below, rational tax assignment depends on the size of subnational juris-dictions and the location of population centers within them; see also King (1993), p. 281–2. Post–apartheidSouth Africa provides an interesting example in which these issues were addressed in writing the new consti-tution. In one proposal, wisely rejected, the Johannesburg metropolitan area would have been divided amongseveral second–tier jurisdictions, in order to provide each with roughly the same fiscal capacity. This wouldhave aggravated problems of tax assignment, by stimulating unhealthy intra–metropolitan tax competition,cross–border shopping, and commuting between jurisdictions. Further examination of these issues wouldtake us far afield.

4 To some extent the same questions arise in federal and unitary systems, the primary difference being thedegree of control national governments exercise over the fiscal affairs of subnational units. In discussingfederal systems it is generally convenient to distinguish between the sovereignty of states and the autonomy oflocal governments. But local governments in some countries with unitary systems (e.g., the Nordic countries)may have fiscal autonomy that exceeds the fiscal sovereignty of states in others with federal systems (e.g.,Germany and Australia). Nor do data necessarily give an accurate picture, if the revenues subnational gov-ernments obtain from tax–sharing—argued below to be more accurately described as a form of grant—areattributed to those governments; see King (1993), pp. 284–5.


341

tions are legacies of history. The final sec-tion reiterates the danger of assuming“one size fits all” in tax assignment.

THE MEANING AND METHODS OFTAX ASSIGNMENT

“Who should tax what?” does not ad-equately describe the tax assignmentproblem; to do that, we must add, “andhow?” A full description of tax assignmentinvolves answering four questions, be-sides which level of government gets therevenue from a particular tax: 1) whichlevel chooses the taxes that a given levelimposes; 2) which defines the tax bases;3) which sets tax rates; and 4) which ad-ministers the various taxes.5 Wheresubnational governments lack controlover all these decisions—but especiallycontrol over tax rates—there will be ver-tical fiscal imbalance, even if subnationalrevenues are adequate to meet expendi-ture needs. Tax assignment is not so muchabout the overall adequacy of revenue asabout control over marginal sources of rev-enue.6

There appear to be three archetypicalways of answering these four questions.In a system based purely on independent

legislation and administration, each jurisdic-tion at a given level of government wouldanswer the four questions as it wishes,subject perhaps to limited constitutionalprohibitions (for example, not taxing in-ternational trade at the state level). (Inwhat follows I will use the term “indepen-dent taxation” for the cumbersome termin italics.)

Tax assignment in the United States fol-lows this pattern; subject only to the Com-merce and Due Process Clauses of the U.S.constitution and minor laws enacted bythe U.S. Congress pursuant to the Com-merce Clause, the states have virtually freerein to levy any taxes they wish—and toadminister them as they wish.7 As dis-cussed below, the Canadian provincesenjoy similar latitude in tax policy; judi-cial decisions have nullified a constitu-tional provision that might appear to pro-hibit provincial sales taxes and excises.

In less extreme versions of this alterna-tive, choices (for example, of the tax baseor tax rates) might be more constrained,by the nation’s constitution, by compactsamong subnational governments,8 or bylaws enacted by a higher level govern-ment.9 The constitutions of some coun-tries identify specific taxes that various

5 I have laid out this line of thinking in greater detail in various places, among them McLure (1998) and (2000b).6 Richard Bird (2000a) states the proposition as follows: . . . “meaningful tax assignment refers to the assignment

of the ability (and responsibility) to determine own revenues in some meaningful way. Subnational govern-ments may be fully financed from what they (and others) may consider their “own” taxes. But if, as is oftenthe case in developing countries, they cannot decide which taxes they levy, what the tax bases are, what ratesare imposed, or how intensively taxes are enforced they actually have no control at all over revenues andhence have really been “assigned” no revenue power at the margin—though perhaps much revenue. Thesingle most critical variable from this perspective is control over the effective tax rate.”

7 This is totally consistent with the views Alexander Hamilton expressed in The Federalist Papers, No. XXXII: “. . . the individual States should possess an independent and uncontrollable authority to raise their ownrevenues for the supply of their own wants.” Hamilton argues in the same paper that the prohibitionof state imposition of import and export duties implies that the states have the right to impose all othertaxes.

8 For example, the members of the EU have agreed to harmonize their value added taxes. There is no similaragreement on harmonization of the state sales taxes in the United States; see McLure (forthcoming).

9 The federal government may use economic incentives, rather than prohibitions, to affect the choices of taxeslevied by subnational governments. Since the federal government of the United States allows credit for 90percent of state unemployment taxes and for much of the death and gift taxes levied by the states, states havelittle incentive not to impose these taxes. Until relatively recently it also allowed itemized deductions for stateand local excises and sales taxes, in effect subsidizing use of these sources of revenue. Now individuals areallowed to deduct only state and local income and property taxes. On the deduction for sales taxes, seeZodrow (1999).


342

levels of government are allowed to levyand/or those that are prohibited.10

Surcharges involve one level of govern-ment administering the taxes of anotherlevel. Although it is commonly the higherlevel that administers taxes for the lower,the opposite constellation is not unknown;Quebec, the only Canadian province tolevy a Value Added Tax (VAT), adminis-ters the federal tax within its boundaries.(Most of the Canadian provinces rely onthe federal government for administrationof their income taxes; this reflects provin-cial choices, not a legal requirement.Quebec’s administration of its own taxes,as well as the federal VAT, reflects con-cerns with the province’s ethnic identity—an issue also found in the oblasts ofRussia.11 The American states rely heavilyon the administrative efforts of the fed-eral Internal Revenue Service (IRS), butfully retain the right to administer theirown taxes.) While minor variations in taxbases can be accommodated, large varia-tions make surcharges unworkable, andcomplete uniformity (as in the Swedishindividual income tax) minimizes com-plexity. This arrangement preserves theability of governments at different levelsto set their own tax rates, without the com-plexity of multiple laws and duplicativetax administrations.

Tax sharing involves one level of gov-ernment sharing revenues from particu-lar taxes with governments at anotherlevel, typically those where revenues aredeemed to originate.12 Ordinarily higherlevel governments share with lower level

governments the revenues from taxes theformer legislate and administer. Since (atleast under the arrangement just de-scribed) individual lower level govern-ments have no control over any of the fourbasic questions of tax assignment, taxsharing is essentially a form of grant, andnot a method of tax assignment. I considerit because of its practical significance asan alternative to true tax assignment inmany countries. For example, the poorestprovinces of Canada have agreed to sharerevenues from the VAT (which is a jointfederal–provincial levy in those prov-inces), rather than continuing to exercisetheir constitutional right to levy their ownsales taxes, as do the other provinces (ex-cept for Alberta, which has no sales tax).13

MUSGRAVE’S THREE–BRANCHSYSTEM AND THE EVOLUTION OFCONCERNS

Richard Musgrave (1959) usefully dis-tinguishes three fiscal functions of govern-ment, which he conceives of being per-formed by three conceptually distinct“branches” of government: resource allo-cation, income redistribution, and macro-economic stabilization. Taxes of the allo-cation branch should, to the extent pos-sible, reflect benefits of public services.By comparison, progressive individualincome taxes and corporate incometaxes would be used to implement incomeredistribution and, through theircountercyclical effects on revenues anddisposable income, endogenous macro-

10 See, for example, the constitutions of Brazil (Articles 145–61), Mexico (Article 73, Section XXIX; Article 117,Section IX), and South Africa (Articles 228 and 229), and the tax codes of various members of the formerSoviet Union (e.g., Articles 3 and 4 of the 1995 Tax Code of Kazakhstan). The list of taxes the national govern-ment of Mexico can impose is commonly interpreted to mean that the states cannot levy those taxes. Untilamended in 1913, the U.S. Constitution effectively precluded federal adoption of an income tax.

11 On the interplay of ethnic separation and regional demands in Russia, see Litvack (1994).12 I distinguish this from revenue sharing, in which pools of revenues are shared, commonly based on formulas

that are not intended to reflect where revenues originate. For example, in Germany the laender administerthe federal VAT, revenue from which is shared among the laender on the basis of a formula. Revenue from therecently enacted Australian VAT is shared with the states in a manner that equalizes fiscal capacity; see below.In neither tax sharing nor revenue sharing do subnational governments control taxation at the margin.

13 Joint federal provincial decision making implies that the federal government has also lost fiscal autonomy.


343

economic stabilization. Taxes might alsobe varied exogenously to implement sta-bilization policy.

The Key Role of Benefit Taxation

Whereas assuring the optimal alloca-tion of resources is properly the functionof all levels of government, Musgrave andothers commonly assign responsibility forincome redistribution and macroeco-nomic stabilization entirely to the federallevel.14 This assignment of fiscal respon-sibilities has important implications fortax assignment. First, for the most partstate and local governments should levytaxes that reflect benefits of public servicesas closely as possible. Second, it seemslikely that only the federal governmentshould levy progressive individual in-come taxes and corporate income taxes;subnational governments are not likely tobe effective in using these taxes for eitherincome redistribution or macroeconomicstabilization, the taxes are not likely toreflect the benefits of public services pro-vided by state and local governments, andthey are likely to distort the geographicallocation of resources. (The accuracy ofthese speculations regarding the patternof benefits depends on the assignment ofexpenditure functions and the incidenceof benefits of public services, both to be

discussed shortly.) This does not meanthat state and local governments shouldnot levy individual income taxes, only thattheir income taxes should be structuredto reflect benefits of public services.15

Given the importance of benefit taxa-tion in the theory of tax assignment,the optimal assignment of taxes ofMusgrave’s allocation branch depends onthe assignment of expenditure functions.Taxes intended to reflect benefits of pub-lic services (e.g., education or constructionand maintenance of roads and highways)or to charge for other costs imposed onsociety (e.g., for medical care for smokersand those who consume alcoholic bever-ages) should be assigned to the level ofgovernment incurring the costs.16 Thatgovernments at all levels should chargethose who create costs is required for fair-ness and economic efficiency, as well asfor the financial viability of govern-ments.17 Thus, while state or local financ-ing is generally appropriate in the case oflocal roads and state highways, federalfinancing is more likely appropriate for aninterstate highway system.18

Taxes that closely reflect benefits of pub-lic services generally would not be ad-equate to finance governments at anylevel; substantial amounts of expendituresmust be financed with taxes that are onlyloosely related to benefits, if at all. This

14 See Musgrave (1959, pp. 179–83); Oates (1968), (1972), and (1994, pp. 128–30); and Boadway (1997, pp. 80–81)and literature cited there.

15 Dahlby and Wilson (1996, pp. 92–3), provide a necessary caveat, however; when two or more governmentstax the same base the result can be overtaxation, because each fails to take account of the effects its taxes haveon the revenue of other jurisdictions. In the case of the income tax this problem can be overcome by havingdifferent levels of government set the tax rates applied to different portions of the income scale. Thus, forexample, states could set the “basic” rate(s) applied to all income and the federal government the rates ap-plied to higher incomes, including the graduated rates employed in the interest of progressive taxation. Iproposed this approach in Asian Development Bank (1999, pp. 305–6). Boadway (1997, pp. 84–5), notes thatit would be virtually impossible to avoid this problem entirely, since the bases of all major taxes (income,payrolls, and sales) overlap substantially.

16 According to similar reasoning revenues from taxes intended to charge for degradation of the environmentshould flow to governments where the degradation is experienced.

17 Optimal expenditure assignment also depends on the degree of interjurisdictional spillovers and economiesof scale in provision of services. Since optimal assignment of financial responsibility may not be entirely toone level of government, intergovernmental grants may be required to reflect spillovers.

18 This is intended as a statement of concept, not an endorsement of the methods actually used to finance theAmerican interstate highway system.


344

does not mean, however, that the benefitprinciple is not important in deciding thestructure of subnational taxation. Perhapsthe most important issues are 1) whethersubnational taxes should be levied onbusinesses or on individuals and 2)whether broad–based taxes levied on in-dividuals (or intended to be paid by them)should be levied where people live orwhere they work.

I would argue that most public servicesprovided by subnational governments areconsumed by individuals, and not bybusinesses. If true, this implies that thereis little case for a subnational corporateincome tax (except to prevent incorpora-tion to avoid individual income tax),property taxes on business property, ororigin–based sales taxes.19 Imposition ofsubnational taxes on business that are notrelated to benefits received can have sev-eral adverse results, among them tax ex-

porting, distortion of the location of eco-nomic activity,20 and distortion of the levelof public services.21 Tax competition be-tween subnational governments is usefulin preventing imposition of taxes on busi-ness that are not related to benefits of pub-lic spending and thus in facilitatingTiebout–type efficiency in subnationalprovision of public service.22

I would also contend that most benefitsof public services are consumed wherepeople live, and not where they work. (Tosee this, consider education and publiclyprovided health services.23 ) If true, thisimplies that residence–based income taxesand destination–based sales taxes are gen-erally preferable to income and payrolltaxes levied by the jurisdiction of employ-ment for the finance of most services pro-vided by subnational governments.24

Progressive individual income taxesgenerally are not appropriate for use by

19 In contrast to destination–based taxes, origin–based sales taxes are unlikely to be shifted unless a state domi-nates the market for a taxed product. Thus I consider them to be taxes on business.

20 A tax does not affect the location of economic activity if a) the tax reflects the benefits of public spending or b)the taxed activity is geographically immobile. If neither of these conditions prevails, the tax may distort thelocation of economic activity. In the first case, tax exporting is appropriate, if benefits are exported. In thesecond case the tax may be exported to non–resident owners of capital or land; of course, capital becomesmore mobile—and burden on owners of capital becomes less likely—with the passage of time. If the taxingstate dominates the national market for the product, the tax is exported in part to non–resident consumers.Even so, taxation affects the location of economic activity unless demand is inelastic.

Exporting of subnational taxes on business ordinarily does not take the form of higher product prices;unless the taxing jurisdiction dominates a national market—a rare occurrence, especially in a globalized world—businesses subject to its taxes cannot affect prices and thus cannot shift business taxes to consumers. (In anearlier time market dominance by taxing jurisdictions was probably greater; consider, for example, Michigan’sdominance of the automobile market a half century ago.) Rather, if such taxes are exported, it is to owners ofthe taxed businesses (or land) who live outside the taxing state and (because such taxes can be deducted incalculating liability for federal income tax) to taxpayers across the country. Besides being unfair, tax export-ing distorts the choice between public and private consumption, by reducing the tax–price residents (who arethe only ones who vote) pay for public services.

21 Non–benefit subnational taxes on mobile factors can lead to underprovision of public services; see Zodrowand Mieszkowski (1986) and Wilson (1999). See also note 24 on “benefit” taxes that do not reflect benefitsreceived at the margin.

22 See Brennan and Buchanan (1980).23 This discussion is predicated on an assumption that external benefits or economies of scale provide the pri-

mary justification for public provision of these services, both of which have substantial private components.If the rationale for public provision of these services is primarily redistributional, the benefit principle is notapplicable.

24 Even if taxes are only loosely related to benefits, they are appropriate on equity grounds and they improvepolitical decisions on the level of public services. Only if “benefit” taxes reflect benefits received at the marginwill the taxes not distort economic decisions. If, instead, benefits and taxes are only loosely related andtaxpayers receive the same benefits at the margin regardless of the taxes they pay, the taxes will distort mar-ginal decisions. Similarly, because of the absence of a mechanism for the exclusion of those who do not pay,public services, once provided, may be overcrowded.


345

state and local governments, as the ben-efits of public spending are not likely torise more rapidly than income, as incomerises. (Again, education and health aregood examples. Benefits of public educa-tion and public health services are notlikely to rise more rapidly than income,especially since higher income individu-als are much more likely than others touse private substitutes.) It is even lesslikely that benefits of public spending pro-vided to businesses flow only to incorpo-rated businesses and vary directly withcorporate profits, as would be required forthe corporate income tax to qualify as abenefit tax.

Implications of De–emphasizingMacroeconomic Stabilization andIncome Redistribution

Since Musgrave published his treatiseThe Theory of Public Finance in 1959, pro-fessional opinion on the efficacy of exog-enous fiscal policy has changed; mosteconomists would now argue that mon-etary policy is a more effective stabiliza-tion instrument than fiscal policy, espe-cially in light of the difficulties of chang-ing fiscal policies quickly in response tochanging economic conditions. Similarly,American public opinion on the desirabil-ity of progressive taxation has also waned,as evidenced by the reduction in top mar-ginal federal individual income tax ratefrom 91 percent (subject to a maximumaverage rate of 87 percent) as late as 1964to 39.6 percent today.25 (Two importantcaveat should accompany this interpreta-tion: First, because of various “loopholes,”almost no one actually paid the high topmarginal rates in the earlier period. Sec-

ond, reforms that combine base broaden-ing/loophole closing with lower marginalrates do not necessarily imply a less pro-gressive tax burden.)

These two developments seem to makethe imposition of progressive federal taxa-tion less crucial. Some have even sug-gested that the federal government shouldeliminate its income tax, albeit for differ-ent reasons.26 It might appear that if thefederal governments did not require rev-enues from the individual income tax,state and local governments could makegreater use of it.

This view is naive.27 Although the U.S.system of tax assignment is based on whatI have called “independent taxation,” thestates do not “go it alone” in legislatingand administering their tax laws, the waynations do. Rather, most base their taxlaws on the federal tax code and relyheavily on the IRS for the administrationof their systems, dealing primarily withdifferences between state and federallaws. If the federal income tax and the IRSwere to be eliminated, it would be neces-sary to replace them with state tax codesand “full–service” state tax administra-tions. Since there would be no federal taxlaw to serve as a starting point, therewould probably be more diversity be-tween state laws and thus more inconsis-tencies, inequities, and distortions.28 Therewould be higher compliance costs andduplication of administrative costs. Statesmight find it hard to obtain informationon interest and dividends their residentsreceive from out–of–state entities.

State problems could be even moredaunting if there were no federal corpo-rate income tax. States would need tomonitor transfer prices on transactions

25 This phenomenon is not limited to the United States. Top marginal tax rates in many countries are well belowtheir levels of forty years ago.

26 Bill Archer, former Chairman of the House Ways and Means Committee (1996, p. 5), said, “I want to tear theincome tax system out by its roots and totally replace it with another form of taxation.”

27 See Strauss (1997) for a more complete development of this theme.28 Anyone doubting the risk of chaos need look no further than the state sales and use tax. See McLure (2000a)

and references cited there.


346

between commonly owned foreign anddomestic entities and implement rules forcontrolled foreign corporations. Given thedifficulty of doing so, there would prob-ably be a resurgence of state interest inworldwide unitary combination, whichother countries would dislike. During the1980s the federal government could pres-sure the states to abandon worldwide com-bination and rely on it to monitor transferprices. It could not in good conscience op-pose state use of worldwide combinationif there were no federal income tax.

There would also be other unfortunateinternational implications. The states areprohibited by the constitution from con-cluding treaties with other countries. Thusthere would be substantial risk of inter-national double taxation (or no taxation).Exchange of information with other na-tions would be even less likely than now,since the federal government would lackboth the incentive and the vehicle to gaininformation. The U.S. would have no seat(or a weak voice) in the fiscal committeeof the Organisation for Economic Co–op-eration and Development.

In short, while the American states en-gage in “independent taxation,” they relyheavily on the federal government forimplementation of their income taxes. Thismight be reason enough for the federal gov-ernment to continue to levy an income tax.

The Importance of Geography

Boundaries between subnational juris-dictions often do not match the limits ofeconomic “catchment areas.”29 That is, thelocal labor market and/or the local retailmarket may not correspond neatly to astate or a local jurisdiction; where this istrue there will be commuting between ju-risdictions and/or cross–border shop-ping. Where cross–border commuting oc-

curs, payroll tax revenues are likely toflow to the “wrong” jurisdiction—that is,to the one where employment occurs, in-stead of the jurisdiction of residence,which is more likely to be charged withproviding the public services people use.This is less likely in the case of individualincome taxes, due to reliance on resi-dence–based taxation. However, resi-dence–based income taxation generallyrequires the filing of tax declarations andis most easily accomplished if the federalgovernment levies an income tax onwhose coattails subnational governmentscan ride.30 In developing countries manywho pay income tax do not file tax returns—and should not, due to the administra-tive and compliance burden involved.This implies that, at least for the immedi-ate future, there may not be much possi-bility of levying a residence–basedsubnational individual income tax insome such countries.

A similar problem may occur in the caseof cross–border shopping; in this case rev-enues flow to jurisdictions where pur-chases are made, instead of to those wherepeople live and consume public services.Indeed, the problems may be even worse,since there is an incentive for unhealthycompetition between jurisdictions to at-tract regional shopping centers to maxi-mize sales tax revenues. Needless to say,both these problems are generally greater,the smaller are subnational jurisdictions.This implies that taxes that may be appro-priate for state governments (e.g., retailsales taxes) may be inappropriate for lo-cal governments.

Subsidiarity

For a variety of reasons taxes that maybe appropriate for a federal governmentmay not be appropriate for a subnational

29 Geographic boundaries that divide metropolitan areas inevitably result from drawing political boundariesalong rivers, instead of along the crests of mountain ranges.

30 Where totally independent taxation by subnational governments is the rule, interstate cooperation betweenstates of employment and states of residence is required.


347

government. Most obviously, subnationalgovernments should not be allowed tolevy taxes on foreign trade. More gener-ally, taxes that would be economicallyneutral (at least regarding resourceallocation within the nation) if leviedby a central government may causeundesirable economic distortions if leviedby a state or local government. And, asnoted earlier, some forms of subnationaltaxes may be exported under certainconditions.

Perhaps the greatest impediment tosubnational use of many taxes, especiallyin LDCs and CITs, is the lack of adminis-trative capacity. While experience showsthat in advanced countries subnationalgovernments acting independently of thecentral government can effectively imple-ment income and sales taxes, similar ex-perience is likely to be rare (if not non–existent) in LDCs and CITs; at best onlysurcharges—and, of course, tax sharing—are likely to be feasible there, and experi-ence reveals little success even with thesealternatives.

Because many taxes are not appropri-ate for subnational governments, becauseit is difficult to implement the taxes thatare appropriate, and because subnationaltaxes that are appropriate may not yieldmuch revenue, a tendency toward verti-cal fiscal imbalance is found in manyLDCs and CITs.31 This shows the impor-tance of subsidiarity—the notion thatsubnational governments (instead of ahigher level of government) should beassigned any tax that they can implement(or that can be implemented for them) thatis not inappropriate for their use. (Thisdoes not imply that the assignment shouldbe exclusive—only that the higher levelgovernment should not monopolize thetax.) In explaining the requirement ofsubsidiarity, the Commission of the Eu-

ropean Communities (1991, p. 7), hasstated, “Member States should remain freeto determine their tax arrangements, ex-cept where these would lead to major dis-ruptions.”

TAX ASSIGNMENT AS A MOVINGTARGET

There may be a tendency to believe thatproper tax assignment can be described,once and for all, based on first principles.In fact, this is not true, because knowledgeof both tax technology and the effects oftaxation change and because economiesevolve.32 This section suggests how theconventional wisdom about tax assign-ment may change with the accretion ofknowledge. The next discusses how eco-nomic evolution may alter what we be-lieve about proper tax assignment.

The Development of Tax Instruments

It seems axiomatic that tax assignmentbased on enumeration of either allowedor prohibited taxes is not likely to dealadequately with taxes that do not exist atthe time assignment is made. Subnationalsales taxes provide support for this propo-sition.

First consider the view of the AustralianHigh Court that the provision of thatcountry’s constitution that reserves “du-ties of excise” to the Commonwealth (fed-eral) government implies prohibition ofstate general sales taxes. Saunders (1997,p. 38), opines, “What do we know aboutthe possible parameters of the definitionof excise duties, when the constitution wasframed? . . . [I]t did not include a generalsales tax, . . . because taxes of this kind werenot in use.” One can only speculate whatthe Australian constitution would havesaid if the operation and effects of gen-

31 Bird (2000a) examines the opportunities for use of various taxes in LDCs and CITs.32 Musgrave (1969, p. 125), writes in a different context, “the economic objectives of tax policy vary with

the stages of economic development, as do the economic criteria by which a good tax structure is to bejudged.”


348

eral sales taxes had been widely under-stood. Similar comments might be madeabout the Canadian constitution, dis-cussed below.

Second, sales taxes have commonlybeen thought suitable for use bysubnational governments. This assign-ment almost certainly, if implicitly, con-templates retail sales taxes; until recentlyVAT has been thought inappropriate foruse by subnational governments.33 Sup-pose for argument’s sake a) that the VATis the best way to levy a federal sales tax,b) that a subnational VAT (including sur-charges on a national tax) is not feasible,and c) that administration of a dual sys-tem combining a federal VAT and asubnational retail sales tax (RST) wouldbe overly cumbersome and costly. Wheredoes that leave tax assignment? Shouldthe federal government adopt the VATand prohibit state use of the RST? Shouldit forego the VAT, so the states can imposethe RST? Should it endorse the clumsydual VAT/RST? Should it adopt the infe-rior RST instead of the VAT, so that statescan impose surcharges on it? Supposenow that a subnational VAT can easilybe imposed, especially in conjunctionwith a federal tax. Is a dual (federal–state)VAT now the assignment of choice?This mental experiment, in which assign-ment of RST may or may not be a goodidea, depending on what we know (or atleast believe) about the possibility of vari-ous levels of government employing theVAT, indicates clearly that what we thinkabout tax assignment depends cruciallyon what we think is administratively fea-sible.34

It would be a mistake, of course, to thinkthat the range of possibilities in tax ad-ministration is immutable. Necessity may

well be the mother of invention in the taxfield. As long as governmental activitywas so limited that it could be financedwith customs duties and excises there waslittle reason—aside from the undesirableprotection of local economic activity(which was presumably favored by thosewho benefitted from it) and other unde-sirable economic effects (which were prob-ably not widely recognized)—to developand employ tax instruments that havegreater revenue yield (and less undesir-able economic effects). The advent of so-cial security and World War II, however,led to introduction of the federal payrolltax and the conversion of the federal in-come tax from a tax on the economic eliteto a “mass tax.”35 (Even earlier the grow-ing need for federal revenues saw passageof the 16th amendment to the U.S. consti-tution, allowing introduction of an incometax that was not apportioned among thestates in proportion to population.) TheGreat Depression of the 1930s (which un-dermined revenues from other sources)saw the introduction of the first state salestax.

When the European Common Marketwas created there was considerable con-cern with the anti–competitive effects ofindirect taxes (most of which were “cas-cading” turnover taxes on gross receipts)and fear that direct taxes might replacetariffs as the means of protecting domes-tic production. Collecting a retail sales taxfrom small retailers was thought to be in-feasible. Thus it was decided that all theMember States should adopt the VAT,despite early recognition that it would bedifficult to employ the destination prin-ciple for internal trade without fiscal fron-tiers or to employ the origin principlewithout uniform rates. Efforts continue to

33 See McLure (2000b) and references cited there.34 The fact that the post–apartheid constitution of South Africa allows the central government to impose a VAT,

but prohibits provincial VATs, including provincial surcharges on the national tax, is consistent with thisproposition. See also the discussion of the legacy of history below.

35 Significantly, both relied on the development of withholding, which greatly facilitates timely collection oftaxes (and also obscures their burden).


349

find a way to achieve a satisfactory desti-nation–based tax system in the EU.36

Understanding of the Economic Effectsof Taxation

The preferred structure of taxes maychange as we learn more about the eco-nomic effects of taxation, and the result-ing structural changes can affect tax as-signment or the structure of subnationaltaxes. For example, turnover taxes wouldideally be replaced by single–stage salestaxes, which in turn would be replaced bythe VAT, primarily in an effort to reducethe adverse effects of taxing business in-puts and to tax services more comprehen-sively. Within the category of single stagesales taxes, taxes levied at the manufac-turing and import stage would be movedfurther down the distribution chain to thewholesale level and ultimately to the re-tail level. In all cases an effort would bemade to implement the destination prin-ciple, by taxing imports, but not exports.However, it is more difficult for states thanfor national governments to employ con-ceptually ideal sales taxes. It is relativelyeasy for a state to levy turnover taxes onall goods produced or sold in the state. Itis more difficult to distinguish betweensales to consumers and sales to businessor to implement a VAT, to tax services aswell as goods, and to provide accurateborder tax adjustments (compensatingimport duties and export rebates). Thussubnational governments may adopttaxes that subsequently seem like dino-saurs, by the standards of later economicthinking. Having done so, they may findit difficult to escape from the tyranny ofthe status quo.

Several aspects of the evolution of thestate corporate income tax deserve men-tion. As long as corporations operatedprimarily within a single state, it was sat-isfactory to impose taxes on the profits ofindividual legal entities. The advent ofmultistate corporations, however, impliedthat formulas would be needed to appor-tion income among the states where a cor-poration operates. Indeed, unitary com-bination, in which the operations of affili-ated corporations deemed to be engagedin a unitary business are combined, maybe required, because of the difficulty ofisolating the profits of related entities.

For many years the bulk of the statecorporate taxes employed a three–factorapportionment formula that gave equalweight to payroll, property, and sales; thelast was presumably included to providerevenue to market states, as well as to rec-ognize in a rough way the contributionthe market state makes to corporate prof-its. In recent years there has been a markedshift toward placing greater weight—oreven sole weight—on the sales factor. Thisshift from origin–based factors (payrolland property) toward a destination–basedfactor (sales) can perhaps be explained inpart as an attempt to reduce the tax–in-duced disincentive for location of eco-nomic activity in the taxing state.

ECONOMIC EVOLUTION AND THECONVENTIONAL WISDOM

In considering how conventional wis-dom on tax assignment might change toreflect economic evolution it will be use-ful to consider four prototypical types ofeconomy and the tax assignments eachseems to imply.37 To some extent these

36 See Bird and Gendron (2000a) and (2000b) and Keen and Smith (1996) and (2000) and literature cited there.37 Economic evolution also changes demands for services provided publicly, producing changes in expenditure

assignment that can have important implications for tax assignment. As late as 1929 total tax receipts of alllevels of government in the United States were less than 11 percent of gross domestic product (GDP), almost2/3 of which were received by state and local governments, primarily from property taxes, which were usedlargely to finance education. Federal assumption of the costs of national defense and the welfare state ex-plains the adoption or growth of the federal income tax and payroll taxes. I do not consider this further.


350

prototypes are intended to reflect the his-torical evolution of the economy of theUnited States. (That this discussion hasstrong temporal–historical overtones re-inforces the importance of when the Mar-tians land on earth.) But I do not intendto suggest that these prototypes exist inpure form in the real world or that theyhave ever existed; probably no economyhas ever exhibited all the attributes of anyof the prototypes, and no others. At anypoint in time a given economy may ex-hibit characteristics of all the previousprototypes. Economic evolution, however,with new attributes replacing old, prob-ably does alter what might seem to be sen-sible tax assignments in roughly the waysindicated. In any event, the discussionhighlights a number of issues that mustbe considered in deciding on tax assign-ment, showing how what seems like sen-sible assignment may change with eco-nomic conditions. A key conclusion is that,because of the rigidity of fiscal institu-tions, economic evolution may render ear-lier tax assignments inappropriate.

Agrarian Society

In a pre–industrial or agrarian society,there are relatively few “tax handles”38—but also modest demands for public ser-vices.39 General income, payroll, and salestaxes are likely to be infeasible, becauseof the small scale of operations, the wide-spread use of cash to effect payments, andthe lack of education and detailed recordkeeping required for compliance and ad-ministration; the presence of limitedamounts of manufacturing and com-merce, much of it informal, as in the mostbackwards of developing countries, doesnot alter this characterization. Instead,there may be heavy reliance on import

duties, export duties, and excises, all ofwhich are applied at “choke points” in theproduction–distribution process. Taxes onforeign trade are not a satisfactory sourceof revenue for subnational governments,and excises are not satisfactory if they can-not be based on the point of consumption,instead of the point of production or im-portation of excisable goods—somethingthat is likely to be difficult in an agrariansociety. In short, it is even more difficultto finance subnational government in asatisfactory manner than to finance thecentral government satisfactorily.

Property taxes levied by local “govern-ments” may work fairly well in agrariansocieties characterized by considerablehomogeneity and readily identifiable ben-efits of public spending.40 For example,agricultural smallholders may agree tojoin together to finance irrigation systemsor education for their children, by levy-ing a tax based on the value of their land.Since everyone knows everyone else andhas a good idea of the value of their land,administration is relatively simple; it is notnecessary to have a complicated cadastralsurvey to record ownership and values ofproperties, and moral suasion may beenough to elicit compliance.

Manufacturing/Purely Local RetailCommerce

The Economy

In the second prototype manufacturingreplaces agriculture as the backbone of theeconomy. Retail commerce is primarilylocal; that is, households buy mostly fromlocal merchants. (Of course, merchantsmake purchases from out–of–state ven-dors, including manufacturers.) There arerelatively few important services, the most

38 See also Musgrave (1969, esp. pp. 125–36).39 This statement is not intended to refer to modern societies that rely heavily on agriculture, such as Denmark

and Iowa.40 Indeed property taxation may work well in other circumstances of homogeneity and easily identified ben-

efits, such as a tax on residential property in small–town America.


351

important being transportation, electric-ity, and telecommunications, all of whichare subject to regulation, and no digitizedcontent. Not only are there no mail ordersales and no electronic commerce in thisprototype—for convenience I assume thatthere is no cross–border shopping, nocommuting across jurisdictional lines, andno tax–induced migration. Corporations(except for those involved in transporta-tion and telecommunications) operate al-most entirely within the state and are al-most entirely locally owned; there is littleout–of–state or foreign investment andthere is no tax–induced migration of capi-tal.41 Because of the limited extent of mar-kets, price competition is generally far lessperfect than the standard theoreticalmodel predicts.

Tax Assignment

In this economy the need for public rev-enues is likely greater than in the agrar-ian prototype. Manufacturing opens thedoor to modern tax instruments: income,payroll, and sales taxes. In advancedcountries subnational governments maybe able to levy any of these taxes; if so,the choice of taxes to assign to subnationalgovernments may seem to be wide open(subject to constraints imposed by educa-tional requirements and the use of cash).42

That is, there would seem to be little rea-son, in principle, not to assign sales taxes,income taxes, or payroll taxes tosubnational governments, as there would

(by assumption) be no issues of tax export-ing (to out–of–state owners of capital,commuters, or cross–border shoppers)and no issues of revenue going to the“wrong” jurisdiction. Sales by remote ven-dors would, by assumption, pose no prob-lem. On the other hand, in LDCs no taxmay work well, even at the national level,except for taxes on natural resources, for-eign trade taxes, and income taxes on cor-porations and the employees of large cor-porations and governments.

The federal government might be as-signed the individual income tax becauseof concerns with income redistribution ormacroeconomic stabilization.43 A furtherreason to assign the income tax to the fed-eral government is that the easiest way toadminister state and local income taxes isas surcharges on the federal tax. (One ofthe most important benefits of surcharges,the possibility of implementing residence–based subnational income taxes, is notrelevant in this prototype because thereis assumed to be no cross–border commut-ing and little out–of–state investment.)

While the conceptual case for a statecorporation income tax is weak, such a taxwould, by assumption, not distort the lo-cation of economic activity in this proto-type. Given the assumed fragmentation ofthe economy, manipulation of transferprices on interstate sales to corporate af-filiates and the difficulty of determiningthe geographic source of income becauseof economic interdependence between

41 We might add assumptions about the characteristics of the primary determinants of the proper assignment ofexcises on motor fuels, tobacco products, and alcoholic beverages. If roads are primarily intrastate, motorfuel taxes should be assigned to the states; interstate highways should be financed by federal taxes. Taxes ontobacco products and distilled spirits are ideally assigned to the state of destination. If the products aremanufactured centrally, state tax stamps are likely to be used to implement destination–based subnationaltaxes. Smuggling may be a problem if states levy substantially different taxes on products characterized byhigh ratios of value to weight and volume, such as alcoholic beverages and tobacco products. To save spaceI ignore the assignment of excises, other than those on telephone service and other public utilities, in whatfollows.

42 Of course, subnational duties on foreign and interstate trade should be forbidden. I do not consider thesefurther. Note, however, the historical importance of eliminating duties on internal trade; for example, in thecreation of modern Germany, in the provisions of the constitutions of Australia, Canada, and the UnitedStates (via the Commerce Clause), and in the formation of the European Common Market (now the EU).

43 In the United States concern with stabilization and income redistribution came well after introduction of thefederal income tax—and perhaps after the economy had moved to the next prototypical stage.


352

affiliated firms might not be importantproblems; indeed, states might departfrom the federal definition of taxable in-come without causing too much trouble,despite the advantages of uniformity. Anapportionment formula that includedpayrolls, property, and sales at destina-tion, to recognize the contributions of bothproducing states and market states, mightseem appropriate.

If the federal government were to beassigned the individual income tax be-cause of concerns with income redistribu-tion or macroeconomic stabilization (orsimply because it got there first), it mightseem appropriate to assign the sales taxto the states. Since each state and localeconomy is assumed to be somewhat au-tarchic in this prototype, little damagewould be done if each state—and perhapseven each local jurisdiction, in some cases—were to define its own sales tax base andadminister its own sales tax. Of course,administration and compliance is simplestif local sales taxes are levied as surchargeson state taxes and administered by thestate. Indeed, a dual federal–state sales taxwould provide some simplification ofadministration and compliance, but thisdoes not seem particularly important,given the assumed fragmentation of thenational economy in this prototype.

Services provided locally by regulatedpublic utilities provide an attractive tar-get for subnational taxation, includinglocal taxation. Excises on such services canbe justified as recouping some of the mo-nopoly profits enjoyed by the utilities andas compensating for the use of the publicright–of–way required for reticulation(that is, for telephone lines, power lines,and pipelines to customers).

Given the assumed unimportance ofother services, exemption of services from

the sales tax would be only a minor prob-lem. Most sales to business would becovered by resale exemptions. Because ofgeographic fragmentation, purchasers areassumed not to be overly sensitive to tax–induced interstate differences in productprices; thus what pyramiding occurs maynot be particularly bothersome. The RSTseems to be the state sales tax of choice inthe fragmented economy of this proto-type, despite the theoretical advantages ofthe VAT, since the latter may require sub-stantial interstate cooperation regardingthe tax base and administration and can-not readily accommodate local sur-charges.44

Property taxation is suitable for use bylocal governments in this prototype, butmay be more problematic than in an agrar-ian society, because the economy is morecomplicated and taxation is no longer ajoint and mutual effort conducted byequals. Besides having a cadastral surveyof agricultural property, it is necessary toknow the value and ownership of othervery different kinds of properties: for ex-ample, urban residential real estate andcommercial and industrial property. Taxa-tion of the property of railroads and pub-lic utilities might be based on the unitaryprinciple; that is, all the property of suchan entity might be divided ratably amongthe jurisdictions where the entity operates,instead of being allocated only to the ju-risdiction where the property is actuallylocated.45

Because of the difficulty of finding ad-equate “tax handles,” even at this stageof development, many developing coun-tries have levied taxes on “industry andcommerce.” Richard Bird has suggestedthat, rather than following this path,which often leads to quite inferior formsof taxation, it might be appropriate for

44 This statement assumes that the VAT has been invented and that it could be used to implement state taxes.See McLure (2000c) and references provided there.

45 In the United States the property of interstate railroads was divided among the states on the basis of miles oftrack in each state; see Dexter (1978) for a survey of this history. This practice provides a precedent for theunitary taxation of corporations, to be considered below.


353

local governments in LDCs to levy an ori-gin–based VAT.46

Many of the tax assignments that seemsensible for this prototypical economycontain the seeds of future problems.

“Conventional” Commerce

The Economy

In this stage the economy has becomemore sophisticated and markets extendfurther, often across the boundaries of tax-ing jurisdictions. While households buyprimarily from local merchants, they in-creasingly make mail–order purchasesfrom out–of–state vendors; electroniccommerce still does not exist. Cross–bor-der shopping and commuting across ju-risdictional lines become increasingly im-portant. Corporations become national inboth their operations and their ownership,as capital markets become national inscope. Economic transactions (e.g., com-muting, migration, investment, and shop-ping, especially for “big–ticket” items andgoods subject to excises) respond more totaxes. There is a pronounced shift frommanufacturing to services.

Tax Assignment

Tax assignments that seemed to makesense in the previous prototype may nowcause problems, depending on particularcircumstances.47 Assignment of sales taxa-tion to state and local jurisdictions startsto seem especially problematic. Thegrowth of regional shopping malls in-creases the likelihood that sales taxes paidby cross–border shoppers go to the wrongjurisdiction—those where the malls are

located. If sales tax is applied to interstatesales by remote vendors, it creates a sub-stantial barrier to interstate trade, due tothe complexity caused by the myriad ofstate sales taxes, each with its own baseand administrative requirements.48 Thiscomplexity is compounded by the need todetermine the local destination of each re-mote sale, so that local sales tax can beapplied. Moreover, it may be difficult fora state to collect sales tax from an out–of–state vendor, and efforts to collect tax fromin–state purchasers are not likely to besuccessful, except in rare cases (registra-tion of the taxable product or purchasesby a business). If these sales are not taxed,the result is significant discriminationagainst local merchants. A dual federal–state RST (perhaps with local surcharges)seems attractive, as it would require a uni-form tax base and uniform administrativerequirements and would facilitate sourc-ing sales to the state level; if sourcing tolocal jurisdictions is needed, it would bevastly simpler under a uniform system.Alternatively, interstate cooperation couldreduce the chaos that results from unco-ordinated imposition of state sales taxes.49

The increasing sophistication of theeconomy aggravates problems. The fail-ure to tax most services causes economicdistortions and inequities. The taxation ofbusiness inputs implies that the sales taxeffectively becomes a haphazard tax oncertain kinds of income, rather than a gen-eral consumption tax. Besides implyingthat the advantages of consumption taxa-tion are not obtained, this introduces anorigin–based element into the sales tax, aswell as distorting other economicchoices.50 A federal VAT would help pre-

46 See Bird (2000a) and (2000b); Bird and Mintz (2000).47 Since the federal level is most likely to be successful in levying most taxes, I focus on problems of subnational

taxation.48 This explains why the U. S. Supreme Court has ruled that the states cannot constitutionally impose a duty to

collect use tax on remote vendors in the absence of a physical presence in the state. The text ignores thefurther problems that would accompany local definition of the sales tax base and local administration.

49 This is essentially what happened when the European Common Market was created. See Hellerstein andMcLure (2001) and the discussion of the tyranny of the status quo below.

50 See Zodrow (1999).


354

vent these problems, as well as facilitat-ing administration. Although state sur-charges on a federal VAT could be usedto provide fiscal sovereignty for states,local surcharges on a VAT seem infeasible.States may see federal imposition of asales tax of any kind as unwelcome.

Some forms of taxation may be moredifficult to implement in a serviceeconomy. Whereas manufacturing and theexploitation of natural resources involveslarge numbers of employees, and thus ameans of control, some services are morelikely to be performed by small indepen-dent operators, who may be more diffi-cult to monitor, for both income and salestax purposes.

In this world state and local individualincome taxes may look better than stateand local sales taxes, despite commutingacross jurisdictional boundaries.51 In ad-vanced countries residence–basedsubnational taxation of cross–border com-muters can be handled by surcharges onthe federal income tax. However, in de-veloping countries residence–based sur-charges may not be an option, because itis not realistic to require more than a smallminority of the population to file incometax declarations; the rest pay income taxvia withholding, which implies thatsubnational surcharges would go to thejurisdiction of employment.

The growth of national corporationsmeans that geographic separate account-ing is unworkable; it is essential to adoptformula apportionment to divide incomeamong the jurisdictions where corpora-tions operate. Economic interdependencebetween the component parts of corporategroups and the possibility of manipulat-ing transfer prices makes unitary taxationattractive; indeed, some will argue thatunitary combination should be applied ona worldwide basis,52 but others claim that

this is extraterritorial taxation. Because thelocation of economic activity is more sen-sitive to taxation than in previous proto-types, there is concern that inclusion oforigin–based factors (e.g., payroll andproperty) in apportionment formulascreates a disincentive for the location ofeconomic activity in the taxing state. Inresponse, states begin to modify their ap-portionment formulas, complicating com-pliance and creating the possibility of thedouble taxation (or no taxation) that for-mula apportionment is designed to avoid.Differences in state and federal definitionsof taxable income create administrativeand compliance problems; uniformity,perhaps via the use of state surcharges onthe national tax base, would offer obvi-ous advantages.

Excises on electricity and telephoneservices provide a bright spot in thisotherwise rather gloomy picture. Theyare expanded to finance a variety of localservices.

Globalized Commerce

The Economy

In the fourth prototype the economy is“globalized.” Corporations are multina-tional, rather than merely national, andboth states and nations compete for in-vestment. Much commerce has becomeelectronic. Only a relatively small portionof e–commerce involves sales to consum-ers (business to consumer (B2C) transac-tions); the real changes from earlier pro-totypes involve electronic business–to–business (B2B) transactions—which in thisworld are almost all sales to business. Insome sectors—primarily for essentiallyhomogeneous commodities that are pro-duced with constant or nearly constantreturns to scale, where barriers to entry

51 Varian (2000) makes the case for substituting state income taxes for state sales taxes. McLure (2000a) notes theimportance of maintaining the status quo because of the difficulty of “wrenching adjustments.”

52 See Miller (1995) and literature cited there.


355

are low—economic reality approachesmore nearly the perfect markets of theeconomists’ model. Competition on an in-ternational scale for many commoditiesand some services increases the “perfec-tion” of such markets. However, the ex-pansion of high–tech industries with sig-nificant economies of scale and other bar-riers to entry creates new monopolies andoligopolies. A key feature of this prototypeis that it is possible for unidentified pur-chasers to pay for undetectable digitalproducts with untraceable money issuedby off–shore institutions (which need notbe financial institutions, in the conven-tional sense of that term).53 Telephone andsimilar services are provided in a highlycompetitive unregulated market; they donot necessarily require wires.

Tax Assignment

Electronic commerce aggravates manyof the problems encountered in the ear-lier prototypes. The increased perfectionof markets implies that disincentives andother distortions caused by taxation aremore important than in other prototypes.Distinctions between taxed goods anduntaxed services and intangible products(e.g., music on compact disks and musicdownloaded from the Internet) becomeincreasingly meaningless, create compli-ance problems, and distort choices. Thefact that barriers to entry for commerce indigital content are relatively low impliesthat the complexity caused by lack of uni-formity of state sales taxes looms largerthan before. Electronic commerce aggra-vates administrative problems originallyencountered in conventional commerce;especially important is the fact that trans-actions resemble much more closely thoseconducted using cash in earlier days.Digital content can be “smuggled” into

a country or across state lines without be-ing burdened by sales taxes.

Competition for investment puts down-ward pressure on national taxes on in-come from capital, as well as state taxes;there is fear that only income attributableto internationally immobile factors—espe-cially labor—can be taxed without dis-couraging investment. (This statementassumes that most taxes on capital are notbenefit taxes.) Permanent establishments(commonly employed to determine juris-diction to impose income tax on non–resi-dent corporations) may not be requiredfor the conduct of business. Economic in-terdependence and opportunities to ma-nipulate transfer prices are greater thanin conventional commerce. Rules for ap-portionment of income in a world of con-ventional commerce may not suffice for aworld of commerce in digital products,since intangible property may have no si-tus and it may be difficult to identify thedestination of sales.

The changing environment for tele-phone services implies that excises leviedon such services by state and local gov-ernments are no longer appropriate.Where signals travel without wires, ex-cises cannot be justified as charges for useof the public right–of–way. In a competi-tive environment telephone taxes can nolonger be justified as payments for theprivilege of earning monopoly profits.Given competition from Internet tele-phony, taxes on telephone services distorteconomic choices. These taxes should beabolished and telephone services shouldbe included in the sales tax base.

Natural Resources: A Digression

In some countries extraordinarily valu-able natural resources are geographically

53 It may be that advances in technology, combined with international agreements, including agreements in-tended to end harmful competition from tax havens, may make some of the “unknowns” (e.g., the identity ofthe purchaser and the nature of products) in this description known. Attempts to utilize such technology andto conclude such agreements will, however, almost certainly encounter substantial opposition from privacyadvocates. See also McLure (2001).


356

concentrated. The exploitation of naturalresources raises vexing questions of taxassignment, especially if there are eco-nomic rents. While perhaps troubling at atime in history when natural resourcesloom large in the output of a state ornation, these issues are likely to recedeover time if other sectors grow morerapidly.

Residents of resource–rich subnationaljurisdictions may believe they have theright to tax such resources, which theymay see as their “heritage.”54 Those notresident in the “lucky” state may wonderwhy the resources are not the heritage ofthe entire nation, raising questions of thenature of federalism in the country. As-signment of resource taxes primarily tosubnational governments can create sub-stantial horizontal fiscal disparities be-tween jurisdictions at a given level andeven vertical fiscal imbalance between lev-els of government.

In addition to being questionable onequity grounds, assignment of the rightto tax important resources that are geo-graphically concentrated has potentiallyadverse implications for economic effi-ciency; since resource–rich jurisdictionscan either provide a given level of publicservices with lower non–resource taxes orprovide more public services with a givenlevel of taxes (or both), excessive amountsof private resources (including human ef-fort) may flow to such jurisdictions.55 Bothequity and efficiency concerns are com-plicated by the fact that the governmentsof resource–rich areas may levy taxes tocompensate for the cost of public servicesprovided to the resource industry (e.g.,roads and hospitals) or for environmen-tal degradation experienced by their resi-dents. Calculation of resource rents shouldtake account of such costs.

Summary

As an economy evolves tax assignmentsthat might seem to be appropriate maybecome inappropriate, or at least problem-atical. The most obvious example is theassignment of the sales tax to state andlocal governments. In a world of purelylocal B2C commerce interstate differencesin tax bases and uncoordinated adminis-tration may be acceptable. Application oflocal surcharges to over–the–counter saleswould not create major problems of com-pliance. The complexity inherent in inde-pendent state sales taxes and the need to“source” sales to the local level, however,could seriously impede the developmentof interstate mail order and electroniccommerce.

There are several ways to resolve thisissue; all involve substantial adjustmentcosts, and they face serious politicalobstacles. Perhaps most radical, stateand local governments could abandonthe sales tax field, presumably replacinglost revenues with revenues from indi-vidual income taxation. Alternatively,states could agree to coordinate theirtaxes, by adopting similar tax bases, uni-form laws, and cooperative administra-tion.56 One way to do this is to imposestate surcharges on the federal sales taxbase (if there is a federal tax); a dual fed-eral–state RST might accommodate localsurcharges, but a dual VAT probablywould not, because of the greater diffi-culty of dealing with credits for VAT onbusiness purchases crossing local bound-aries.

It is worth noting that the current de-bate on taxation of electronic commercefocuses on simplification of the state salestax. This should not be surprising, sincethat is precisely where yesterday’s con-

54 Note the italicized word in the name of the Alberta Heritage Saving Trust Fund, which was established duringthe energy crisis of the 1970s.

55 See Boadway and Flatters (1982). Mieszkowksi and Toder (1983) conclude that these efficiency costs aregenerally small.

56 For a description and evaluation of recent efforts of this type, see McLure (forthcoming).


357

ventional wisdom is least appropriate totoday’s world. Reform efforts must con-front the tyranny of the status quo, how-ever, to be considered in the next section.

THE LEGACY OF HISTORY

Choices of tax assignment depend cru-cially on history and both reflect and de-termine the degree of sovereignty allowed(or enjoyed by) second–tier governments.As Bird (2000a) notes, “The tax assign-ment that actually prevails in any coun-try inevitably reflects more the outcomeof political bargaining in a particular his-torical situation than the consistent appli-cation of any normative principles.”

Tax Assignment as a Reflection—and aCause—of Weak and Strong States

Tax assignment in the United States re-flects the fact that the constitution reservesto the states all powers not expresslygranted to the federal government. Simi-larly, the Member States of the EuropeanUnion, which are independent nations,retain virtually all taxing powers, assign-ing almost none to the Union.57

By comparison, the constitutions ofmany developing countries—especiallythose that have unitary systems—givesubnational governments few taxing

powers. For example, the Constitution ofSouth Africa, which has a unitary govern-ment, concentrates taxing power at thenational level and provides the provincesrelatively limited taxing powers. To theextent that expenditures are appropriatelyconducted at the provincial level, this maycreate vertical fiscal imbalance.58

Weak and Strong States: A Tale of TwoFederations59

Australia and Canada, despite theirobvious similarities (e.g., both are large,sparsely populated former British colonieswith federal systems), provide an inter-esting contrast of how history affects taxassignment, resulting in strong and weaksubnational governments.60 In Canadathe constitutional provision limitingprovinces to “direct taxation within theprovince” would seem to eliminate thepossibility of provincial sales taxes,which economists commonly categorizeas indirect taxes.61 Provincial retail salestaxes, however, have been found to sat-isfy this prohibition, which has been in-terpreted as being intended to prevent taxexporting.62 Because the provinces canlevy both income taxes and sales taxes,they are fiscally “strong;” they can paytheir own way and are accountable to theirelectorate to be fiscally responsible be-

57 The Treaty of Rome requires unanimous consent to impose restrictions on taxation. Member States have,however, agreed to limit exercise of taxing powers, especially in the area of indirect taxation, in order to createa single market. See also McLure and Weiner (2000, pp. 27–80) and references cited there.

58 Actually many of the backlogs of services that are the legacy of apartheid are best addressed at the local level,where revenue sources—property taxes and charges for services provided by public utilities—are somewhatmore adequate, at least in urban areas. That the provinces are fiscally weak reflects, at least in part, the wishesof the African National Congress, which controls the national parliament, but not those of several importantprovinces (KwaZulu–Natal and Western Cape).

59 Analogous comparisons could be made between the highly decentralized federation of Brazil and the central-ized federations of Argentina and Mexico.

60 Of course, the chain of causation is neither unidirectional (from history to tax assignment to the degree ofcentralization) nor simple. The web of interrelated forces is far more complex; see, for example, Courchene(1996). Where there is a desire for centralization, subnational governments are not likely to have the ability toraise significant revenues.

61 This provision is in Section 92 of the 1867 British North America Act (BNAA), the predecessor to the Canadianconstitution, which was “patriated” in 1982. For an excellent summary of the Canadian system of tax assign-ment, see Boadway (1997).

62 See Boadway (1997, pp. 67–70). The VAT levied by Quebec has been ruled to be acceptable because taxcollected before the retail level is reimbursed via the tax credit mechanism.


358

cause they control marginal sources ofrevenues.63

In Australia the situation has developedquite differently; the states do not paytheir own way and their governments arethus not accountable or fiscally respon-sible. The primary culprit is judicial inter-pretation of Section 90 of the constitution,which states, “. . . the power of the Parlia-ment to impose duties of customs and ofexcise . . . shall become exclusive.” Thismight seem to allow state sales taxes, butit has been interpreted as prohibitingthem. Whereas economists might defineexcises to be selective sales taxes leviedon either the production or the consump-tion of particular products, the High Courtof Australia, through interpretations thathave become increasingly inclusive overtime, has defined them as “taxes directlyrelated to goods imposed ‘at some step’in their production or distribution beforethey reach the hands of the consumers.”64

The different assignment of the incometax in the two countries also reflects his-tory. In both countries the exigencies offinancing World War II led to the concen-tration of income taxation at the federal

level. In Canada this taxing power wasonly “rented” to the federal governmentand thus was returned to the provincesafter the War. In Australia, however, thefederal government has relied on Section96 of the constitution (“. . . until the Par-liament otherwise provides, the Parlia-ment may grant financial assistance to anyState on such terms and conditions as theParliament thinks fit.”) to avoid returningthe income tax to the states.65

Recent reforms in Australia have fur-ther increased state fiscal reliance on theCommonwealth government.66 Revenuesfrom a newly enacted VAT (called theGoods and Services Tax or GST) are to beallocated to the states, in exchange for re-peal of a variety of minor state taxes. Aspart of the deal, Commonwealth“equalisation grants” to the states are be-ing reduced; the upshot is that the federalgovernment will, in effect, retain about 60percent of revenues from the GST. Thesame methodology will be used to deter-mine state shares in GST revenues as forthe previous equalization grants. Anychange in the base or rate of the GST re-quires the unanimous agreement of all the

63 This statement must be qualified by the fact that provinces can be characterized as “haves” and “have nots.”The latter (primarily the Maritime provinces) receive substantial grants from the federal government andhave recently entered into an arrangement whereby they share revenues from the federal VAT; see Bird andGendron (1998). Even so, because of the income tax, they have substantial fiscal autonomy at the margin,unlike the Australian states.

64 From Bolton v. Madsen (1963), quoted in Petchey and Shapiro (1997, p. 44). A consistent definition appears inCapital Duplicators v. Australian Capital Territory (No. 2) (1993). It appears that the framers of the Australianconstitution did not know what they intended the crucial words “duties of excise” to mean; Saunders (1997,p. 26), quotes High Court Justice HcHugh as saying, “They did not seem to understand, really, what theywere about.” Saunders notes (p. 24) that the definition may have seemed unimportant when the constitutionwas being written, since excises accounted for only 5 percent of the revenues of all the colonies (the forerun-ners of the Australian states).

Until recently the High Court ironically accepted as constitutional franchise fees on sellers of alcoholicbeverages, tobacco products, and petroleum products, which are subject to excises throughout the world,provided they were worded sufficiently artfully to avoid being classified as excises. In 1997 all state businessfranchise taxes were, in effect, declared unconstitutional.

65 It must be acknowledged that state politicians have not always been anxious to have this power, recognizingthat, in a phrase quoted in Walsh (1996, p. 125), and (with slightly different wording) Collins (2000, p. 59), “theonly good tax is a Commonwealth (Federal) tax.” Walsh notes, “There is nothing legally or constitutionallypreventing the states from, individually or collectively, re–entering the income tax field. The obstacles .. are a combina-tion of political convenience and political threat.” (Emphasis in original) Since there is little doubt that the federalgovernment would reduce its grants to any state imposing an income tax dollar–for–dollar, states have littleincentive to exercise this option; see Collins (2000, p. 60).

66 See Collins (2000).


359

states and the federal government. Thesubstitution of GST revenue, over whichthe states exercise no control, for revenuefrom previous state levies, which were sub-ject to state control, implies that the reformsweaken state governments and increasevertical fiscal imbalance in Australia.67

The “Tyranny of the Status Quo”

The “tyranny of the status quo” is a spe-cial legacy of fiscal history. In 1967 Brazilassigned the VAT to the states, before itwas generally realized that it is adminis-tratively difficult to implementsubnational VATs. To compound matters,the Brazilian state VAT is an origin–basedlevy, which creates various additional eco-nomic and administrative problems.68

Recently Ricardo Varsano (2000) has madea convincing case for a novel method ofadministering a destination–based stateVAT.69 Even so, and despite the concep-tual arguments for either shifting the VATto the federal level or switching to a des-tination–based state tax, the political in-fluence of the states makes it difficult toachieve either reform.70

This tyranny can also be seen in theUnited States. Several episodes of inter-est in a federal VAT have encountered se-rious opposition from state and local gov-ernments, who see the sales tax base asuniquely theirs; federal interest in an RSTwould probably face even fiercer opposi-

tion.71 On the other hand, arguments thatstate and local governments should aban-don the sales tax in favor of the individualincome tax, because of difficulties inimplementing subnational sales taxes—arguments that would be valid if we werestarting de novo—must address thewrenching practical problems transitionwould cause, as well as political opposi-tion to change.72

The complexity of the state sales taxesalso reflects history; the “system” “justgrowed,” as each state chose its own defi-nition of taxable sales, wrote its own stat-utes, regulations, and administrativerules, and determined the conditions un-der which local jurisdictions could also taxsales. The resulting complexity and otherirrational elements of the taxes (notably,taxation of many sales to business andexemption of many sales to consumers)show amazing immunity to change, de-spite their manifest disadvantages. Ofspecial practical importance is the fact thatthe U.S. Supreme Court, relying heavilyon stare decisis—the judicial embodimentof the tyranny of the status quo—hasfound the sales tax “system” so compli-cated that states cannot require remote(out–of–state) vendors who lack a physi-cal presence in the state to collect tax onsales made into a state.73

Development of the VAT in Europe pro-vides an interesting contrast to this. Whenthe European Common Market was cre-

67 Of course, in both Australia and Canada the federal government also has less fiscal autonomy under the taxsharing arrangement, due to the requirement that state or provincial governments (in HST provinces) acqui-esce in VAT changes.

68 See McLure (2000c). This is not to say that a destination–based VAT would not pose problems; but thesewould be somewhat different and primarily administrative, not economic (except to the extent that insur-mountable administrative problems created economic distortions).

69 See also McLure (2000c). Varsano had originally made this proposal in 1995.70 Varsano notes that the economically and politically powerful Southern industrial states face a quandary. They

benefit from the use of the origin principle for interstate trade. However, they—like other states—are hurt bythe tax wars that the origin principle engenders.

71 One potential political advantage of a federal subtraction–method VAT is the fact that it looks less like a salestax, even though it might have quite similar economic effects.

72 See the contrasting views of Varian (2000) and McLure (2000a). The fact that five states do not even have anincome tax would greatly increase these transitional problems.

73 For more on this topic, including state efforts to simplify the system, see McLure (forthcoming) and referencescited there.


360

ated, the Member States decided that theymust have a harmonized sales tax system,in order to avoid interference with inter-nal trade. Thus they threw out the statusquo, consisting primarily of turnovertaxes, which were notorious for their dis-tortions, and adopted a more nearly uni-form system based on the VAT.74 This sug-gests that when conditions are fluid andthe stakes are high enough, the status quocan be overcome. It will be interesting tosee whether the fear of lost revenue cre-ated by the advent of electronic commerce—a fear that may subside with the declineof the high–flying dot.com economy—provides enough stimulus for the Ameri-can states to radically simplify their sys-tems, in order to gain either Congressionalor judicial approval of efforts to imposeon remote vendors an expanded duty tocollect tax.

The Legacy of Socialism

The members of the former SovietUnion, whether they be federations suchas Russia or unitary governments such asKazakstan and Ukraine, have reliedheavily on tax sharing, instead of eithersurcharges or independent taxation.75

This reflects several legacies of the Sovietperiod: the use of tax sharing under theSoviet system of central planning; the lackof the administrative capacity (and thedata) needed to implement surcharges, letalone independent taxation bysubnational governments; the existence ofquasi–dictatorial central governments op-erating behind a facade of democracy insome countries; and (at least in Kazakstan,which has a unitary government) mistrustof lower–level governments to implementappropriate choices, because of lack ofexperience with democracy. Conversely,

governments of Russian oblasts (mostnotably the resource–rich oblasts in East-ern Siberia) wish to levy their own taxes,because—for valid historical and currenteconomic reasons—they do not trust thecentral government to deliver oblastshares of revenues collected by the fed-eral government and/or do not think tax–sharing formulas are fair.

CONCLUSION

It is dangerous to assume that “one sizefits all” in the area of tax assignment. Whatmight seem sensible may be renderedfoolish—by advances in the technology oftaxation (for example, the invention of theVAT, once unknown, then thought to beappropriate only for central governments,and now thought perhaps to be suitablefor states), by improved understanding ofthe effects of taxation (for example, theresults of taxing business inputs or includ-ing origin–based factors in formulas usedto apportion corporate income among ju-risdictions), and by economic evolution(for example, the shift from a manufac-turing economy with primarily local re-tailing to a globalized digital economydominated by services). This danger isseen no more clearly than in the sales taxemployed by most of the American statesand half of the Canadian provinces. Re-flecting their origins in a much more au-tarchic time when we worried much lessabout the economic effects of taxes (bothbecause economists knew less about theseeffects and because the effects weresmaller), these taxes exhibit substantialproblems: application to many businesspurchases, exemption of many services,inordinate complexity, and de facto exemp-tion of many direct purchases by house-holds. A more rational tax assignment,

74 Hellerstein and McLure (2001) discuss this contrasting history of the American sales tax and the EuropeanVAT more fully. Of course, this substitution is much easier than replacing state sales with income taxes.

75 This is equally true in other countries that had (or have) socialist systems, such as Vietnam and the nations ofEastern Europe. See Wallich (1994), the papers in Bird, Ebel, and Wallich (1995), and Martinez and McLure(1999). Engelshalk (1997) reports on decentralization of taxing powers in Central and Eastern Europe.


361

given what we know now, might lodgesales taxation at the federal level, withstate and local governments relying moreheavily on residence–based individualincome taxes implemented as surchargeson the federal tax. Such a radical reformis unlikely, however, as is perhaps the ra-tionalization of the existing sales taxes, be-cause of the tyranny of the status quo.76

Acknowledgment

The author wishes to acknowledge thehelpful comments Richard Bird andGeorge Zodrow made on an earlier draft.

REFERENCES

Archer, Bill.“Goals of Fundamental Tax Reform.” In Fron-tiers of Tax Reform, edited by Michael Boskin,3–9. Stanford, CA: Hoover Press, 1996.

Asian Development Bank.Fiscal Transition in Kazakhstan. Manilla: AsianDevelopment Bank, 1999.

Bird, Richard M.“Rethinking Subnational Taxes: A New Lookat Tax Assignment.” Tax Notes International20 (May 8, 2000a): 2069–96.

Bird, Richard M.“Subnational Revenues: Realities and Pros-pects.” Paper presented to the World BankInstitute Workshop on IntergovernmentalFiscal Relations and Local Financial Man-agement. Almaty, Kazakhstan, April 2000b.

Bird, Richard M., Robert D. Ebel, andChristine I. Wallich, editors.

Decentralization of the Socialist State: Intergov-ernmental Finance in Transition Economies.Washington, D.C.: World Bank, 1995.

Bird, Richard M., and Pierre–Pascal Gendron.“Dual VATs and Cross–Border Trade: TwoProblems, One Solution?” International Taxand Public Finance 5 No. 3 (July, 1998): 429–42.

Bird, Richard M., and Pierre–Pascal Gendron.“ VATs in Federal States: International Ex-perience and Emerging Possibilities.”Mimeo, 2000a.

Bird, Richard M., and Pierre–Pascal Gendron.“CVAT, VIVAT, and Dual VAT: Vertical‘Sharing’ and Interstate Trade.” InternationalTax and Public Finance 7 No. 6 (December,2000b): 753–61.

Bird, Richard M., and Jack M. Mintz.“Tax Assignment in Canada: A Modest Pro-posal.” In The State of the Federation 1999/2000: Toward a New Mission Statement forCanadian Fiscal Federalism, edited by HarveyLazar, 263–92. Montreal: McGill QueensUniversity Press, 2000.

Boadway, Robin.“Tax Assignment in the Canadian FederalSystem.” In Reshaping Fiscal Federalism inAustralia, edited by Neil A. Warren, 61–90.Sydney: Australian Tax Foundation, 1997.

Boadway, Robin, and Frank Flatters.“Efficiency and Equalization Payments in aFederal System of Government: A Synthe-sis and Extension of Recent Results.” Cana-dian Journal of Economics 15 No. 4 (Novem-ber, 1982): 613–33.

Brennan, Geoffrey, and James Buchanan.The Power to Tax. Cambridge: CambridgeUniversity Press, 1980.

Collins, David J.The Impact of the GST Package on Common-wealth–State Financial Relations. Sydney:Australian Tax Research Foundation, 2000.

Commission of the European Communities.“Removal of Tax Obstacles to the Cross–frontier Activities of Companies.” Supple-ment 4/91 to the Bulletin of the European Com-munities. Brussels, 1991.

Courchene, Thomas J.“The Comparative Nature of Australian andCanadian Economic Space.” In ReformingFiscal Federalism for Global Competition, ed-ited by Paul Boothe, 7–21. Edmonton: Uni-versity of Alberta Press, 1996.

76 Richard Bird notes, in commenting on an earlier draft of this paper, that large changes are more difficult in theUnited States than in other federations because of the absence of a system of transfers from the federal gov-ernment to the states that could be used to assure that no state experienced a significant loss in resources.


362

Dahlby, Bev, and L.S. Wilson.“Tax Assignment and Fiscal Externalities ina Federal State.” In Reforming Fiscal Federal-ism for Global Competition, edited by PaulBoothe, 87–107. Edmonton: University ofAlberta Press, 1996.

Dexter, William D.“The Unitary Concept in State Income Taxa-tion of Multistate–Multinational Busi-nesses.” The Urban Lawyer 10 No. 2 (Spring,1978): 181–212.

Engelschalk, Michael.“Fiscal Decentralization in Central and East-ern Europe.” In Reshaping Fiscal Federalismin Australia, edited by Neil A. Warren, 121–35. Sydney: Australian Tax Foundation, 1997.

Hellerstein, Walter, and Charles E. McLure, Jr.“Sales Taxation of Electronic Commerce:What John Due Knew All Along.” State TaxNotes 20 No. 4 (January 1, 2001): 41–6; alsoforthcoming in the Proceedings of the Ninety–Third Annual Conference on Taxation. Wash-ington, D.C.: National Tax Association.

James, Denis W.Intergovernmental Financial Relations in Aus-tralia. Sydney: Australian Tax ResearchFoundation: 1992.

Keen, Michael, and Stephen Smith.“The Future of the Value Added Tax in theEuropean Union.” Economic Policy 23 (Oc-tober, 1996): 375–411; 419–20.

Keen, Michael, and Stephen Smith.“Viva VIVAT!” International Tax and PublicFinance 7 No. 6 (December, 2000): 741–51.

King, David.“Australian Reform Options: A EuropeanView.” In Vertical Fiscal Imbalance and the Al-location of Taxing Powers, edited by D. J.Collins, 265–99. Sydney: Australian Tax Re-search Foundation, 1993.

Litvack, Jennie I.“Regional Demands and Fiscal Federalism.”In Russia and the Challenge of Fiscal Federal-ism, edited by Christine I. Wallich, 218–40.Washington, D.C.: World Bank, 1994.

Martinez, Jorge, and Charles E. McLure, Jr.“Intergovernmental Fiscal Relations in Viet-nam.” Asia– Pacific Tax Review 5 No. 1 (Janu-ary, 1999):17–32.

McLure, Charles E., Jr.“The Tax Assignment Problem: Ends,Means, and Constraints.” Public Budgetingand Financial Management 9 No. 4 (Winter,1998): 652–83.

McLure, Charles E., Jr.“Rethinking State and Local Reliance on theRetail Sales Tax: Should We Fix the StateSales Tax or Discard It?” Brigham Young Uni-versity Law Review 2000 No. 1 (2000a): 77–137.

McLure, Charles E., Jr.“Tax Assignment and Subnational Fiscal Au-tonomy.” Bulletin for International FiscalDocumentation 54 No. 12 (December, 2000b):626–35.

McLure, Charles E., Jr.“Implementing Subnational VATs on Inter-nal Trade: The Compensating VAT (CVAT).”International Tax and Public Finance 7 No. 6(December, 2000c): 723–40.

McLure, Charles E., Jr.“Taxation of Electronic Commerce in Devel-oping Countries.” Paper presented at a con-ference on “Public Finance in DevelopingCountries: A Conference in Honor of Rich-ard Bird,” Stone Mountain Georgia, April5–6, 2001.

McLure, Charles E., Jr.“Taxing Electronic Commerce: Legal, Eco-nomic, Administrative and Political Issues.”The Urban Lawyer, forthcoming.

McLure, Charles E., Jr., and Joann M. Weiner.“Deciding Whether the European UnionShould Adopt Formula Apportionment ofCompany Income.” In Taxing Capital Incomein the European Union: Issues and Options forReform, edited by Sijbren Cnossen, 243–92.Oxford: Oxford University Press, 2000.

Mieszkowski, Peter, and Eric Toder.“Taxation of Energy Resources.” In FiscalFederalism and the Taxation of Natural Re-sources, edited by Charles E. McLure, Jr. andPeter Mieszkowski, 65–91. Cambridge: Lex-ington Books, 1983.

Miller, Benjamin F.“None Are So Blind as Those Who Will NotSee.” Tax Notes 8 (February 13, 1995): 1023–335.


363

Musgrave, Richard A.The Theory of Public Finance. New York:McGraw–Hill, 1959.

Musgrave, Richard A.Fiscal Systems. New Haven, CT.: Yale Uni-versity Press, 1969.

Musgrave, Richard A.“Who Should Tax, Where, and What?” In TaxAssignment in Federal Countries, edited byCharles E. McLure, Jr., 2–19. Canberra: Cen-tre for Research on Federal Financial Rela-tions, 1983.

Oates, Wallace E.“The Theory of Public Finance in a FederalSystem.” Canadian Journal of Economics 1 No.1 (February, 1968): 37–54.

Oates, Wallace E.Fiscal Federalism. New York: Harcourt BraceJovanovich, Inc., 1972.

Oates, Wallace E.“Federalism and Government Finance.” InModern Public Finance, edited by EugeneSmolensky and John Quigley, 126–51. Cam-bridge, MA: Harvard University Press, 1994.

Petchey, Jeffrey, and Perry Shapiro.“An Economist’s View of Section 90 of theAustralian Constitution.” In Reshaping Fis-cal Federalism in Australia, edited by Neil A.Warren, 41–59. Sydney: Australian TaxFoundation, 1997.

Saunders, Cheryl.“The High Court, Section 90 and the Austra-lian Federation.” In Reshaping Fiscal Federal-ism in Australia, edited by Neil A. Warren, 21–39. Sydney: Australian Tax Foundation, 1997.

Strauss, Robert P.“Administrative and Revenue Implica-tions of Alternative Federal Consump-

tion Taxes for the State and Local Sector.”The American Journal of Tax Policy 14 No. 2(Fall, 1997): 361–452.

Varian, Hal R.“Taxation of Electronic Commerce—A U.S. View.” CESifo Forum 1 No. 3(Autumn, 2000): 3–9; also available athttp://www.internetpolicy.org/briefing/4_00_story.html.

Varsano, Ricardo.“Subnational Taxation and the Treatment ofInterstate Trade in Brazil: Problems and aProposed Solution.” In Decentralization andAccountability of the Public Sector, edited byS. J. Burki and G. Perry, 339–55. Washing-ton, D.C.: The World Bank, 2000.

Wallich, Christine I., editor.Russia and the Challenge of Fiscal Federalism.Washington, D.C.: World Bank, 1994.

Walsh, Cliff.“Making a Mess of Tax Assignment: Aus-tralia as a Case Study.” In Reforming FiscalFederalism for Global Competition, edited byPaul Boothe, 109–40. Edmonton: Universityof Alberta Press, 1996.

Wilson, John Douglas.“Theories of Tax Competition.” National TaxJournal 52 No. 2 (June, 1999): 269–304.

Zodrow, George R.State Sales and Income Taxes. College Station,TX: Texas A&M Press, 1999.

Zodrow, George R., and Mieszkowski, Peter.“Pigou, Tiebout, Property Taxation, and theUnderprovision of Local Public Goods.”Journal of Urban Economics 19 No. 3 (May,1986): 356–70.

article 09-mclure - national tax journal

Documents