In this theoretical chapter, I explain why I expect decentralization to significantly matter on economic outcomes, and specifically on income inequality and inequality in public/welfare state policies. First, I explain the key component of my theoretical argument: the causal mechanism that links territorial governance (decentralization) and income inequality through the channel of the welfare state. The welfare state, by definition, engages in taxation and spending, and therefore connotes redistribution, but not all welfare states have the same commitment to equality (Esping-Andersen & Myles, 2009). With that in mind, I explain the importance of territorial governance (decentralization) on income inequality, by elaborating on the arguments that touch upon welfare state policies in different ways. Furthermore, I look at decentralization both from (a) a static angle—meaning taking the overall decentralization level—and from (b) the dynamic angle, which looks at the process of decentralization over the years, in line with previous work, such as Dardanelli (2019). Decentralization is considered with respect to both the self-rule of subnational units and their shared-rule with the central government.