This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments,...

Assigning taxes to regional governments is a major issue in all federations. Although neither the literature nor international experience provides clear guidelines on precisely what taxes should be assigned to states, we suggest that Australia should nonetheless reconsider the advisability of...