# **Table of Contents**

|1.<br>In|troduction ................................................................................................................. 1|
|---|---|
|2.<br>Ta|x Assignment: The Standard Model ....................................................................... 3|
|2.1.|Rules for Tax Assignment .................................................................................... 3|
|2.2.|What is a “Subnational” Tax? .............................................................................. 6|
|3.<br>Th|e “Second-Generation” Assignment Model ........................................................... 8|
|3.1.|The Key Points ..................................................................................................... 8|
|3.2.|Tax Assignment in Practice.................................................................................. 9|
|3.3.|Normative Rules on Tax Assignment ................................................................ 12|
|4.<br>Ot|her Issues Related to Tax Decentralization ........................................................... 14|
|4.1.|The Capacity Issue ............................................................................................. 15|
|4.2.|The Equalization Issue ....................................................................................... 16|
|4.3.|The Revenue Issue ............................................................................................. 17|
|4.4.|The Stabilization Issue ....................................................................................... 18|
|4.5.|The Development Issue ...................................................................................... 19|
|4.6.|The Accountability Issue .................................................................................... 20|
|5.<br>W|hat Taxes for Subnational Government? ............................................................... 21|
|5.1.|A Policy Choice Matrix ...................................................................................... 22|
|5.2.|The Heart of the Matter ...................................................................................... 23|
|6.<br>A|n Appraisal of Potential Subnational Taxes ........................................................... 27|
|6.1.|Property Taxes.................................................................................................... 28|
|6.2.|Excise Taxes ....................................................................................................... 33|
|6.3.|Personal Income Taxes ....................................................................................... 34|
|6.4.|Payroll Taxes ...................................................................................................... 36|
|6.5.|General Consumption Taxes .............................................................................. 37|
|6.6.|Business Taxes ................................................................................................... 39|
|7.<br>C|onclusion ................................................................................................................ 43|
|Refere|nces ......................................................................................................................... 46|

# **Tables**

|Table 1: Tax Assignment in a Federal State: The Standard Approach ............................... 4|
|---|
|Table 2: Share of Central and Subnational Taxes, Selected Countries and Years_(percent)_<br>........................................................................................................................................... 11|
|Table 3: A Policy Matrix for Subnational Taxes .............................................................. 24|
|Table 4: Evaluating Subnational Business Taxes ............................................................. 41|