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This article discusses the paper on revenue formation and revenue sharing, presented at the International Seminar on Fiscal Federalism and Change of Functions in the Finance and Banking Systems, held in December 1994, in Moscow, Russia, by the author. The objective of the paper was to discuss the principals that could be used to allocate optimally governmental functions and revenue sources across national, territorial and local governments. In American federal system, each level of government does have its own revenue sources. additionally the revenue is shared across levels of government. The American national government has two principal types of revenue sources, taxes and fees. All the states share some of their revenue with their local governments. Presently, about 7% of the national governments expenditures got to state and local governments. Independent revenue sources for local governments are a key to local government policy development and capacity.