Abstract

In their ground-breaking work The Power to Tax, Buchanan and Brennan find decentralization to be the key to protect citizens from excessive taxation. Citizens could compare, choose, and migrate, and thus force their government in tax competition to administer their money with due care. In our contribution to this book, we argue that a solid financial architecture requires institutional congruence. The power and responsibility for taxation, expenditures, and debt must be consequently decentralized or centralized. If fiscal decentralization or centralization, however, is incomplete, citizens and their governments will have perverse incentives to spend excessively and to shift the debt/tax burden to the common pool of interconnected fiscal units. We illustrate our argument with an analysis of four distinct models of fiscal organization in the United States of America, France, Germany, and the European Monetary Union.