Fiscal efficiency in the Indian federation c.2

It is in this context, primarily, that recent literature on fiscal federalism has opened up new areas for research. On the one hand, it is argued that the fact of economies of scale in tax collection has to be established and cannot be taken for granted. Moreover, if higher and lower levels of government end up co-occupying the same tax base, the distortionary impact of the two taxes together has to be weighed against the alleged economies of scale in tax collection on the part of the central government. There is an imperfect but quite telling rule in public finance that the ex cess burden or deadweight loss from a tax is roughly proportional to the square of the tax rate'. If the economies of scale in tax collection are relatively small and the co-occupation of tax base im plies that the effective tax rate rises steeply, the dead weight loss from the tax will rise even more steeply. In such situations, it is conceivable that it might be less costly for the states to levy the taxes and to make transfers to the central government. These are relatively new areas for research. Recent references include Boadway and Keen (1994).