Political economy of fiscal federalism: United States of America

The concept of federalism, which has generally discussed at the political and administrative aspects, has recently begun to be addressed extensively in financial dimension along with the effects of globalization. At the heart of the concept of fiscal federalism lies the fact that the local governments should be autonomous in their spending decisions and have the power to determine their revenues so that they can take responsibility for these expenditures. There are many reasons why the concept of fiscal federalism is accepted in the world. The most important one is that it contributes to a better macroeconomic performance for the country by improving efficiency and performance of public sector. Accordingly, the political economy of fiscal federalism, which is carried on an interdisciplinary basis, has become an important issue to be emphasized. In this study, firstly, federalism and fiscal federalism concepts were defined. After that the basic arguments, assumptions and bases of the First Generation Theory and Second Generation Theory of fiscal federalism were examined in detail on economic and political ground. Finally, political economy of fiscal federalism in the US was studied. In this section, the revenues and expenditures of governments which plays a key role in the evaluation and design of fiscal federalism were examined. In order to analyze the relationship between fiscal federalism and economic growth, which is one of the important indicators of macroeconomic performance, an empirical study was done. According to results, in accordance with theories, economic growth is positively affected by an increase of the rate of fiscal federalism which is calculated through the ratio of local expenditures to total expenditures; but in contrast to theories, economic growth is negatively affected by an increase of the rate of fiscal federalism which is calculated through the ratio of local tax revenues to total revenues.