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James Buchanan’s theory of federalism: from fiscal equity to the ideal political order

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Improved allocations, or outcomes, can be achieved only through improvements in the institutions that generate them, and improvements in such institutions, in turn, can be achieved only if their proper role in the whole structure of democratic process is appreciated and understood.

James M. Buchanan (1967)

Abstract

The distinct characteristic in James Buchanan’s thinking about federalism in contrast to the traditional theory of fiscal federalism is his view about fiscal competition. In this paper, it is demonstrated that this thinking went through three stages. From the 1950s to the beginning of the 1970s, his analyses were well embedded in the traditional fiscal federalism literature and concerned with equity and efficiency issues. In the Leviathan approach starting from the mid-seventies, he considered competition between jurisdictions as a means to restrict Leviathan governments. In his interpretation of federalism as an ideal political order, Buchanan binds these perspectives together and adds a procedural view: Federalism enables citizens to exert political control, it raises their interest in politics because one vote has more influence, and it facilitates to act morally within their moral capacity.

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Notes

  1. According to Breton (1996, p. 254), this analysis belongs to the income redistribution tradition of intergovernmental grant systems in contrast to the interjurisdictional spillover, fiscal imbalance or inefficient mobility of labor traditions.

  2. Oates (1972, p. 84) acknowledges that Buchanan’s analysis is in principle compelling, but that it neglects further complications in federations apart from the income differences as one of the many sources of horizontal inequity in a federal system.

  3. These papers precede the classical studies on fiscal externalities in the traditional fiscal federalism literature by Flatters et al. (1974) or Zodrow and Mieszkowski (1986) and Wilson (1986).

  4. The first generation studies include all papers until 2002, but also the papers by Baskaran (2011), Cantarero and Perez (2012) and Kwon (2013). Voigt and Blume (2010) apply a factor analysis to study the impact of federalism on a large number of dependent variables including government spending. The factor capturing revenue autonomy does however not indicate the extent of fiscal competition between jurisdictions and could therefore not be used to test the Leviathan hypothesis. I consider this study to belong neither to the first nor the second generation studies.

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Acknowledgments

I would like to thank the participants of the James Buchanan Memorial Conference held in September 2013 in Fairfax, VA, in particular Roger Congleton, for their comments.

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Feld, L.P. James Buchanan’s theory of federalism: from fiscal equity to the ideal political order. Const Polit Econ 25, 231–252 (2014). https://doi.org/10.1007/s10602-014-9168-9

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