Overall, it seems that some countries that have adopted local income taxation have
encountered difficulties with ‘excessive taxation’. However, to a large extent this is
attributable to problems in the efficient delivery of public services and the absence of
effective tax competition. High personal income taxation is not a natural consequence of
fiscal autonomy, as should be evident from the experience of countries such as the US and
Switzerland. In a recent empirical study comparing federal and non-federal states, Keen
(1997) shows that, in general, there is no evidence that income taxation is higher in states
where both national and sub-national (state/regional) governments co-occupy the same tax
base. For the reasons already explored, any increase in fiscal autonomy in the UK would
probably require some form of local income taxation for regional government, and the
experience of Scandinavia suggests that a limited system of additional taxation might be the
best way forward, combined with a system of horizontal equalisation.
The wider economic impact of Tax Competition: empirical evidence
The Scandinavian experience illustrates a key debate in the theory public finance: does
decentralisation lead to smaller or bigger government, and what impact does it have on
economic performance more generally? In setting out their ‘Leviathan hypothesis’, Brennan
and Buchanan (1980) point out that factor mobility implies that decentralisation will lead to
smaller government. Empirical evidence on this has been mixed at best (Oates, 1985),
although a problem with early empirical studies is that they were based on cross-section data.
Since many other factors affect government size, it is unlikely that cross-section studies can
effectively test such a hypothesis. More recently, Rodden (2001) used panel data on 40
countries over the period 1978-97 to revisit the hypothesis. Whilst the results are not
unequivocal, Rodden does seem to find that there is an inverse correlation between greater
fiscal autonomy and the size of the public sector, whilst higher proportions of sub-central
expenditures financed through tax-sharing or central grants are shown to be correlated with
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