Some political aspects of taxation and distribution in federal governments: An application of the theory of the core

Abstract. The purpose of this paper is to study questions about taxation and revenue sharing n federal systems. It is particularly concerned with the effect of the heterogeneity of regions on the pattern of taxation and distribution and on the capacity of the central government to retain revenue for its own purposes. It is argued that one useful way to study such questions is to treat federations as coalitions that try to maximise their returns from taxations schemes. This approach is developed using the theory of the core from cooperative game theory. Emphasis is placed on the political constraints on the capacity of the central government.