After theoretically considering the problems of tax collection and corruption, we empirically analyzed our theoretical findings using a unique data set on Russian regional governments. Our theoretical models predict that the Russian system of transfers does not ensure an adequate level of incentives for tax collection by its subnationals and that, under certain condition, the numbers of tax inspection employees are inversely related to the tax collection. Empirical evidence strongly buttresses our theoretical findings and sheds significant light on one of the most con-tentious issue (intergovernmental fiscal relationship) in the Russian Federation.