Public Finance, 2nd Edition

evading diVerent taxes has to be considered in determining what mix of taxes

to use to meet the government's total revenue requirements.

The goal of simplicity adopts the taxpayers' point of view. Taxpayers

have to be able to comply with the tax laws fairly easily for a tax to be used.

They must be able to understand the tax laws and not suVer undue record-

keeping and Wling burdens. A clear example of this principle is the preference

in less-developed countries for taxing businesses rather than people. The

average person is not educated enough to maintain records on income or

prepare and Wle an income tax form, regardless of how honest or dishonest he

or she may be. Therefore, the less-developed countries tax businesses simply

because they are able to collect taxes on businesses.

FISCAL FEDERALISM

A hierarchical structure of national, state (provincial), and local governments

raises a number of interesting normative issues that cannot arise with a single

government. Foremost among them is the question: What is the advantage of

having layers of governments as opposed to a single national government? In

terms of the prevailing jargon, should government be decentralized or cen-

tralized? The conventional wisdom within democratic societies is that a highly

decentralized federalism is preferable because local government oYcials know

the preferences of their citizens better than national oYcials do. Therefore,

each legitimate function of government should be provided at the lowest level

of government in the Wscal hierarchy, consistent with the requirements of

eYciency and equity.

Counterbalancing this conventional wisdom are some diYcult problems

associated with the ability of people to move from locality to locality in

response to local government policies. The ability to move can itself generate

ineYciencies that would not be possible with a single government. It also

raises the possibility of multiple equilibria or no equilibrium at all as people

search for the localities that maximize their utilities. Mobility also severely

limits the possibilities for redistributing income at any level in the Wscal

hierarchy other than the national level. Suppose a locality undertakes a tax-

transfer policy to redistribute income from its high-income citizens to its low-

income citizens. The high-income citizens have an incentive to move to

another locality that is not redistributing, thereby undermining the original

locality's redistribution policy and lowering the average income in the locality

as well. At the same time, we shall see that denying a government the

distribution function removes its political identity in the mainstream model

of the public sector. This leads to another fundamental problem for a norma-

tive theory. With each person simultaneously being a citizen of multiple

governments and with some of the governments lacking political identities,

1. INTRODUCTION TO NORMATIVE PUBLIC SECTOR THEORY 25