A Review of the Empirical Evidence on the Effects of Fiscal Decentralization on Economic Efficiency: With Comments on Tax Devolution to Scotland

This paper reviews the existing empirical evidence on tax decentralization ("tax .devolution") from central government to sub-central government. Sub-central government is taken to be levels above the local level: such as within the UK at the level of Scottish government/executive in Edinburgh, and at the provincial government level in Canada or Spain. Our interpretation of the literature is that there is increasing empirical support for the proposition that tax decentralization helps in promoting economic efficiency and economic growth. It is noted that a distinction must be drawn between tax decentralization and spending decentralization. Where tax decentralization follows spending decentralization - as would be the Scottish case, any adverse economic effects emanating from spending decentralization cannot be blamed on tax decentralization. Indeed, as we argue elsewhere, tax decentralization has the potential of correcting any negative economic effects caused by spending decentralization.