We consider a model where local and national governments both tax income and use the revenue to invest in both productive and consumptive public goods. Local governments will overprovide the consumptive public good if the local income tax is (partially) deductible. However, without full...

We show that federalism will lead to higher economic growth. We present a model of endogenous growth where government services, funded by income and capital taxes, are a component of production. In this model a decentralized government will choose tax policy to maximize economic growth, while a...

We revisit the classic problem of tax competition in the context of federal nations, and derive a positive theory of partial decentralization. A capital poor median voter wants to use capital taxes to provide public goods. This results in redistributive public good provision. As a consequence,...