The revenue assignment problem: Ends, means, and constraints

This paper examines tax assignment, which level of government should tax what, and how. Federal administration of state surcharges avoids duplication and complexity of independent subnational legislation and administration and, unlike tax sharing, allows states to control tax rates. Both governments can employ individual income taxes, via surcharges. The corporation income tax and value-added tax are best federal taxes; state taxes distort the location of economic activity and complicate compliance and administration. The retail sales tax is better on these grounds, but is difficult to implement in less developed countries.