The conventional economic theory of federalism has typically highlighted a federal public sector's potential to maximise economic efficiency. Unfortunately although many of the problems associated with fiscal federalism cannot be confined within a purely fiscal view of their source or remedy, traditional/conventional economic thinking has, by and large, continued to do so. As a consequence of the extensive use of public goods analysis, very little attention has been devoted to the evolutionary dynamics of federal states. Challenges to the conventional framework have resulted in many economists appreciating the deficiencies of its theoretical constructs and policy prescriptions. Although the new framework implicitly recognises the significance of non-economic federal realities, questions concerning the model's compatibility with Australian federalism have largely been ignored. By applying the model to the case of vertical fiscal imbalance, this study aims to fill that gap. In doing so, it is argued that Commonwealth-State fiscal imbalance is an impediment to an effective and efficient Australian Federation. In response to this, the States have proposed a State personal income tax (PIT) surcharge. Whilst the Commonwealth government and some economists oppose this initiative, this thesis supports the dominant professional view that it is warranted. More importantly, it finds that the new model pays sufficient attention to Australian federalism's non-economic phenomena. By integrating Australian federalism's non-economic phenomena, this thesis provides a more comprehensive critique of Australia's intergovernmental fiscal reform debate. Although numerous obstacles exist, the prevalence of favourable economic, institutional and political influences support an optimistic likelihood of Commonwealth-State fiscal reform.