Subnational Taxation in Developing Countries: A Review of the Literature

This paper reviews the literature on tax assignment in decentralised countries. Ideally, own-source revenues should be sufficient to enable at least the richest subnational governments to finance from their own resources all locally-provided services that primarily benefit local residents. Subnational taxes should also not unduly distort the allocation of resources. Most importantly, to the extent, possible subnational governments should be accountable at the margin for financing the expenditures for which they are responsible. Overall, the 'best' package for any particular country or subnational government is likely to be not only context-specific and path-dependent, but also highly sensitive to the balance struck between different political and economic factors and interests.