Wealth and Tax Systems

Abstract

What are the economic criteria for a successful federal system, especially when changes in economic conditions occur? Over time, varieties of both exogenous and endogenous economic effects occur within a federal system. Consumers may change their consumption patterns, technology will change, interjurisdictional relationships may deteriorate or improve, and general economic conditions will go through cycles. These changes, in turn, will lead to endogenous changes in governments’ behavior, which will then affect the system’s equilibrium. This chapter analyzes the impact of these changing economic effects on a federal system of government. It emphasizes the different ways that the system can change, note empirical work on the magnitude of these changes, and then attempts to analyze some policy issues. While this chapter does not fully answer the question posed in the first sentence, it provides some insights as to the necessary economic conditions for the long-run success of a federal system.