Integration, decentralization, taxation, and revenue sharing : Good governance, sustainable fiscal policy and poverty reduction as peace-keeping strategies

grants system
. The highest degree of cen-
tralism is given in case of fully centralized sovereignties and a central fiscal admini-
stration, which raises the tax revenue for all taxes on the central level. Then grants or 
intergovernmental transfers are paid from the central budget to the budgets of the 
lower jurisdictional levels, which have no influence on legislation, administration, and 
the local as well as regional tax revenue. Fully decentralized is a system in which the 
subordinated jurisdictions have all sovereignties and the central state, federation or 
union is financed by the member entities. This holds partly true for the budget of the 
EU being partly financed from revenue of the member states (see figure 5). 
Figure 6 intuitively groups the different revenue sharing systems due to the extent of 
centralization and decentralization. Without doubt separate taxation with free compe-
tition and a grants system from the lower to the higher jurisdictional levels are the 
most decentralized ones. Separate taxation without legislative sovereignties for the 
lower levels and the grants system from the central state to the lower level have the 
highest degree of centralization. But the possibilities to implement decentralized tax 
systems also have consequences for the organization of the tax administration and 
the internal revenue service (IR). The tax base must be assignable to the different 
jurisdictional levels and at best the revenue offices should also be hierarchically 
structured due to the existing jurisdictional levels. With modern information technol-
ogy (IT) such information can also be raised by central offices but still local offices 
are necessary for the jurisdictions to control their own tax base and to supply cus-
tomer oriented advice for the taxpayers thus improving the transparency of the tax 
system and compliance of the taxpayers (especially to avoid tax evasion and transfer 
fraud).

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