Let's take a look at funding government. Most would agree that the further away an office is held, representing a larger group of people, the harder it is for a citizen to influence the decisions that are made.
Hence the preference for government action to be taken at the lowest level of scale at which it is able to effect the action. This principal, is known as Subsidiarity.
Academic research (Kerr Summarizes in a paper called 'Taxation Powers and Expenditure Responsibilities for Different Levels of Government"), identifies informational and motivational advantages to assigning taxation authority and spending to those closest to the decisions.
Issues arise when there is an imbalance between the taxation powers at the disposal of a government and its expenditure responsibility. For example, when the Federalies have more voter insulation and highly efficient taxation capability like payroll taxes and corporate and individual income taxes.
The more efficient taxer creates dependency of the State and Local governments by moving money through intergovernmental transfers, i.e. Grants. This allows the politicians running the insulated government with the high taxing efficiency to 'influence' the actions of the other levels of government. With the Federalies having efficiently sopped up all the money the taxpayers are willing to contribute to government, the State, County and Locals are left with insufficient revenue capacity to respond to community goals for better schools, more roads and transit, and policing. Instead, they have to do the bidding of the decision making the occurs in Washington. Subsidies in the form of 'Grants' become the be all and end all as communities spend time chasing 'Grants,' think 'Race to the Top,' and the receipt appears to release the local government from bearing all the costs of decisions and foster inefficient overspending.
Conversely, the move away from local, low scale, say a County government or a State government to the national governement results in one size fits all solutions which coerce more than solve. These solutions are often favored by those who choose to govern, in effect by those who are attracted to their career calling by the prospect of getting up every day and running the lives of others according to what they think is 'right.' As Hayek said, powerful bureaucracies don't attract angels.
On the expenditure side, this creates huge inefficiencies as the Federal government engages in management of all sorts of areas of government services and life that it should not engage in and would not engage in if it didn't gather the money and remit it to lower levels of government.
As an example, according to the Atlanta Journal Constitution newspaper, the 2010 budget starting July 1 of one state, Georgia, is funded 33% with intergovernmental transfers from the Federal government. The total spending is planned at $38.5 billion. This is funded by $17.9 billion in state taxes, $12.88 billion in Federal transfers, and the balance in fees. The Federal transfers have risen from 23% of funding in 2003.
The only justification in the literature for intergovernmental transfers is equity. In some cases this has been court ordered, for example where States fund County provided education in order to ensure that all districts have equal funding whether the County be rich or poor in its own economic outcome. In others, it is national policy, sometimes on solid, other times on shaky assumptions, for example, equity in the retiree safety net of social security and, with less justification, equity in access to health care in all areas of the nation.
Accurate Reality: Clear thinking Americans shouldn't focus on reducing taxes at every level, but should focus on reducing 'excess taxation' by the Federal government and the resultant intergovernmental transfers. More attention should be on the equity of equity. Is equity what clear thinking Americans want? Or are differences in choices made by States and localities to be encouraged and celebrated? There is a level of equity that we have all agreed will not be violated on civil rights. Otherwise, Tax it where it is spent or not at all. Let the local polity vote. This is taxation with representation. Make each state decide what level of spending there will be on health care. Make each County decide what level of spending there will be on Education. This will result in a level of public spending desired by the people of the United States to support the limited government.