12 central transfers. Countries in transition from one political balance to another (such as Spain and Russia) have gone in different directions from time to time, sometimes moving towards more and sometimes towards less subnational fiscal autonomy.<sup>23</sup> This political economy perspective provides no normative guidance as to _what_ should be done, but sometimes it may help explain _why_ whatever it is has been done.

# **3.3. Normative Rules on Tax Assignment**

The major normative rules found in the conventional fiscal federalism literature were set out earlier in Section 2.1. A reductionist statement of the guidance to tax assignment that emerges from the standard literature is more or less that the central government not only gets all the big taxes but also determines which remnants of the tax system – essentially those that fall least on mobile bases -- should be given to subnational governments.

A very different normative assignment rule was suggested by Brennan and Buchanan (1980) in their Leviathan model. As they observe, the conventional model of fiscal federalism can be interpreted as a revenue-maximizing model (subject to efficiency and, perhaps, equity constraints). However, since the objective in Brennan and Buchanan (1980) is to limit the grasp of the government leviathan rather than to extend it, they argue that subnational taxes should be imposed on _mobile_ factors so that intergovernmental competition for tax base would lead to lower tax rates and hence smaller governments. In this view, to paraphrase McLure (1986), what's good for the private goose is good for the public gander; that is, competition is seen to be as healthy and beneficial between governments as between private economic agents.<sup>24</sup> As Breton (1996) demonstrates, however, in reality governments are usually both more competitive and less monolithic (and monopolistic) leviathans than Brennan and Buchanan (1980) assume. While there is much still to be learned about intergovernmental competition between governments at the same level (horizontal competition) as well as between governments at different levels (vertical competition), in the context of tax assignment it seems fair to conclude that there is no great analytical or empirical support for either extreme position in this debate.<sup>25</sup> From a subnational perspective the outcome of the discussion of tax assignment in the second-generation literature is somewhat less bleak than either of the rules just discussed. Perhaps the most useful practical formulation of the normative approach suggested in the second-generation literature is that of McLure (2000a). As discussed in Section 3.1, that literature emphasizes the need for subnational governments to control their own revenues in order to ensure effective decentralized control of spending.<sup>26</sup> However, all that is

> 23 Of course, the same is true in for example Australia and Canada (Winer, 2000).

> 24 It should be emphasized that McLure (1986) does not recommend that subnational government _should_ tax mobile factors; but he does note that if such governments do so, then competition might have beneficial effects in some circumstances.

> 25 For surveys of the ever-growing tax competition literature from different perspectives, see Breton (2006), Salmon (2006), Wilson and Wildasin (2004), and Afonso, Ferreira, and Varsano (2002).

> 26 Although the point is not further discussed here, it may also be argued that such subnational control over revenues may also be helpful for stabilization purposes, for example in restraining excessive subnational