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Competing in taxes and investment under fiscal equalization

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Author Info
Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
Susana, PERALTA (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
Sholmo, WEBER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

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Abstract

The paper considers a model of a federation with two heterogeneous regions that try to attract the capital by competing in capital income taxes and public investment that enhance the productivity of capital. The regionsÕ choices determine the allocation of capital across the regions and their revenues under a tax sharing scheme. This framework allows for the examination of different approaches to fiscal equalization schemes (Boadway and Flatters, 1982, and Weingast, 2006). We show that tax competition distorts (downwards) public investments and that the equalization grants discourage public investments with a little effect on equilibrium taxes. However, the equalization schemes remain beneficial for the federation and, provided that the degree of asymmetry is small, for each region as well.

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Publisher Info
Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2006062.

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Length: 16
Date of creation: 29 Nov 2006
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Handle: RePEc:ctl:louvec:2006062

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Related research
Keywords: Heterogeneous Regions; Fiscal Federalism; Fiscal equalization; Public Investments;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bev Dahlby & Neil Warren, 2003. "Fiscal Incentive Effects of the Australian Equalisation System," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 434-445, December. [Downloadable!] (restricted)
  2. Shah, Anwar, 2004. "Fiscal decentralization in developing and transition economies: progress, problems, and the promise," Policy Research Working Paper Series 3282, The World Bank. [Downloadable!]
  3. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  4. Zhuravskaya, Ekaterina V., 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Journal of Public Economics, Elsevier, vol. 76(3), pages 337-368, June. [Downloadable!] (restricted)
    Other versions:
  5. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September. [Downloadable!] (restricted)
  6. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February. [Downloadable!] (restricted)
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  7. Jean Hindriks & Gareth D. Myles, 2003. "Strategic Inter-Regional Transfers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 229-248, 04. [Downloadable!] (restricted)
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  8. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Andrei Shleifer, 1996. "Government in Transition," Harvard Institute of Economic Research Working Papers 1783, Harvard - Institute of Economic Research.
    Other versions:
  10. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, 01. [Downloadable!] (restricted)
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  11. Hepp, Ralf & von Hagen, Jürgen, 2001. "Regional Risksharing and Redistribution in the German Federation," CEPR Discussion Papers 2662, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October. [Downloadable!] (restricted)
  13. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November. [Downloadable!] (restricted)
  14. Matsumoto, Mutsumi, 1998. "A note on tax competition and public input provision," Regional Science and Urban Economics, Elsevier, vol. 28(4), pages 465-473, July. [Downloadable!] (restricted)
  15. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September. [Downloadable!] (restricted)
  16. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May. [Downloadable!] (restricted)
  17. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer, vol. 9(6), pages 631-649, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. O. Amerighi & G. De Feo, 2009. "Is Competition for FDI Bad for Regional Welfare?," Working Papers 680, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  2. Sebastian Hauptmeier & Ferdinand Mittermaier & Johannes Rincke, 2008. "Fiscal Competition over Taxes and Public Inputs: Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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