The theory of fiscal federalism addresses three issues related to fiscal decision-making: the assignment of responsibilities and functions between the federal government and regional governments, the assignment of fiscal power and the design of intergovernmental transfers (subsidies) of fiscal resources together with provisions on lending windows to subnational governments. These factors give rise to a third question regarding the relative size of the public sector in the national economy. It is therefore the dynamics of these processes and public policy choices that ultimately determine the performance of the tax sector and its impact on the national economy. An important aspect of the exercise of fiscal federalism is the assignment of fiscal functions to federal and subnational governments and the appropriate means to finance these responsibilities. The theory of fiscal federalism does not provide a clear separation of fiscal responsibilities that would promote economic efficiency and the distribution of resources. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essayThe general idea of ​​normative theory is that spending responsibilities in the areas of macroeconomic stabilization and redistribution functions should remain within the federal government, while allocation functions should be assigned to lower levels of government. The argument is based on the reasoning that lower levels of government have limited capacity and policy tools to provide stabilization and redistribution functions. Due to the nature of its responsibilities, the federal government typically assumes macroeconomic stabilization and income redistribution functions and ensures that regional governments do not adopt measures incompatible with these functions. Furthermore, there are functions such as national defense and foreign affairs that have the character of a national public good and therefore usually assigned to the central government. Fiscal decentralization and assignment of functions can generate economic efficiency of the public sector. If preferences are heterogeneous across jurisdictions, as is very likely to be the case, decentralized decision-making power regarding the provision of local public goods and services improves efficiency by tailoring services to the preferences of the local population. The main argument is that local governments are closer to the local population and can identify their choices and preferences better than the central government. Consequently, when the decision to provide a package of public goods is made by local officials and these officials are directly accountable to local voters, there is an incentive for local public officials to provide services that reflect the preferences of the local population. Furthermore, as long as there is a close relationship between the benefits derived from public services and taxes on local taxpayers, there is an additional incentive to use resources efficiently and cost-effectively. At least implicitly, the theory recognizes the need for local authorities to exercise choice in the provision of public services that have higher local demand rather than resorting to the unitary solution. The decentralization theorem suggests that, under such conditions, decentralization of fiscal decision-making can improve the efficiency of the public sector and the well-being of the local population. What kinds of taxes should be allocated to the federal government and what should be allocated to local governments? Theory and practice in assigning tax power identify the following main criteria in the assignment process:.