The theory of fiscal federalism addresses three issues related to fiscal decision-making: the distribution of responsibilities and functions between the federal government and regional governments, the distribution of power of taxation and the design of an intergovernmental transfer (grant) of fiscal resources coupled with provisions on borrowing windows to subnational governments. These factors raise a third question regarding the relative size of the public sector in the national economy. It is therefore the dynamics of these processes and public policy choices that ultimately shape the performance of the fiscal sector and its impact on the national economy. An important aspect of exercising fiscal federalism is the allocation of fiscal functions to federal and subnational governments and the appropriate means of financing these responsibilities. The theory of fiscal federalism does not provide for a clear separation of fiscal responsibilities that would promote economic efficiency and resource allocation. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay The general idea of ​​normative theory is that spending responsibilities in the areas of macroeconomic stabilization and redistributive functions should remain the domain of the federal government while allocation functions should be assigned at lower levels of government. This argument is based on the reasoning that lower levels of government have limited capacity and policy instruments to provide stabilization and redistribution functions. Due to the nature of its responsibilities, the federal government generally assumes macroeconomic stabilization and income redistribution functions and ensures that regional governments do not take actions inconsistent with these functions. Furthermore, certain functions such as national defense and foreign affairs have a national public good character and are therefore generally assigned to the central government. Fiscal decentralization and allocation of functions can generate economic efficiency in the public sector. If preferences are heterogeneous across jurisdictions, which is most likely the case, decentralized decision-making over the provision of local public goods and services improves efficiency by tailoring services to the preferences of the local population. The main argument is that local governments are closer to the local population and can better identify their choices and preferences than central government. Accordingly, when the decision to provide a set of public goods is made by local officials and these officials are directly accountable to local voters, they have an incentive to provide services that reflect the preferences of the local population. Furthermore, as long as there is a close relationship between the benefits of public services and the taxes levied on local taxpayers, there is an added incentive to use resources efficiently and profitably. At least implicitly, the theory recognizes the need for local authorities to exercise choice in the provision of public services that attract greater local demand instead of resorting to the unitary solution. The decentralization theorem suggests that, under such conditions, decentralization of budgetary decisions and project creation can improve the efficiency of the public sector and the well-being of the local population. What types of taxes should be assigned to the federal government and which.