The research subject of this doctoral thesis is the optimal model of the fiscal equalization system to maximize the supply of local public goods and services. Namely, the task and challenge of this thesis was to create an optimal model of fiscal equalization based on the creation of a comprehensive database that can be applied to different economies, regardless of differences in the degree of fiscal decentralization, the system of territorial-administrative division, geomorphological, socio-economic and other characteristics. The main objective of the thesis is to confirm the basic hypothesis that the existing system of fiscal equalization in the Republic of Croatia needs to be improved since it does not take into account all local public revenues when determining the fiscal capacity of local units. The aim of the research was to determine the basic characteristics of the fiscal equalization system in world practice and to answer the question to what extent the system of dividing public expenditures and income has become uniform. The answers to the above questions were provided by an empirical analysis based on a sample of OECD countries. The results served as guidelines for the establishment of a new system of fiscal equalization that takes into account the comprehensive relationships between the structure and distribution of public revenues, the distribution of public functions and the transfer mechanism. The empirical analysis of the fiscal equalization system in OECD member countries has shown that the system of public expenditure sharing has been largely optimized and that it is possible to find theoretical and empirical guidelines. However, the question remains as to the alignment of the income structure, which shows clear trends over time but still considerable differences between OECD countries. The analysis of the current system of fiscal equalization in the Republic of Croatia and the calculation of Gini coefficients of concentration have shown that the existing system of fiscal equalization does not take into account all local public revenues when determining the fiscal capacity of local units. An important conclusion of the thesis is that it is possible to include the distribution of income from property in the system of fiscal equalization, which aims at the process of capitalization, i.e. capital investments within the framework of local self-governments, which ultimately increase the value of all property through the collection of communal contributions and fees. In perspective, a similar mechanism can be applied in case of possible changes to the tax system and the affiliation of certain forms of taxation to certain levels of public authority or, in other words, by defining property tax and/or consumption tax (part of VAT or additional tax) as a local source of income. Finally, there is the question of the allocation mechanism of revenues obtained through the framework of the fiscal equalization system. In this sense, it would be interesting to take a step forward and adopt an innovative mechanism in which non-designated transfers would be financed from income that local authorities would use in accordance with priorities: capital investments and maintenance from property income, and activities related to promoting economic development and competitiveness in the local community from the taxation of consumption income. This concept represents an innovation since the system of designing the equalization mechanism in theory and practice mainly considers the mechanisms for equalizing fiscal inequalities and does not address the issues of effectiveness and expediency of spending such public transfers.