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Apportionment, Fiscal Equalization and Decentralized Tax Enforcement

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Author Info
Christian Traxler () (Max Planck Institute for Research on Collective Goods, Bonn)
Andreas Reutter (University of Konstanz)

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Abstract

We study tax evasion and decentralized tax enforcement in a federal economy with mobile capital and the endogenous formation of multiregional companies. Regions use their enforcement policy as a strategic instrument to engage in fiscal competition. Within this framework, we analyze the uncoordinated policy choice under formula apportionment (FA) and compare it to the incentives which derive from fiscal equalization (FE). As both systems redistribute collected revenues but not enforcement costs, they distort the regions' incentives to enforce taxes. At the same time, jurisdictions partially internalize the fiscal externalities caused by their enforcement policy. We show that the tradeoff between these two opposing effects differs between FA and FE, and crucially depends on the degree of interregional firm integration under FA. We discuss conditions under which FA, FE or a joint system of FA cum FE provides the ‘best’ incentives for decentralized tax enforcement.

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Publisher Info
Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_21.

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Length: 27 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:mpg:wpaper:2008_21

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Related research
Keywords: Tax Enforcement; Tax Evasion; Formula Apportionment; Fiscal Equalization; Tax Revenue Sharing;

Find related papers by JEL classification:
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

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References listed on IDEAS
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  1. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
  2. 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)
  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.
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    Other versions:
  5. Riedel, Nadine & Runkel, Marco, 2007. "Company tax reform with a water's edge," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1533-1554, August. [Downloadable!] (restricted)
  6. John Knight & Li Shi, 1999. "Fiscal decentralization: Incentives, redistribution and reform in China," Oxford Development Studies, Taylor and Francis Journals, vol. 27(1), pages 5-32. [Downloadable!] (restricted)
  7. Wolfgang Eggert & Guttorm Schjelderup, 2003. "Symmetric Tax Competition under Formula Apportionment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 439-446, 04. [Downloadable!] (restricted)
  8. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March. [Downloadable!] (restricted)
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    Other versions:
  10. Sven Stö & Christian Traxler, 2005. "Tax Evasion and Auditing in a Federal Economy," International Tax and Public Finance, Springer, vol. 12(4), pages 515-531, August. [Downloadable!] (restricted)
  11. Jorge Martinez-Vazquez & Andrey Timofeev, 2005. "Choosing between Centralized and Decentralized Models of Tax Administration," International Studies Program Working Paper Series, at AYSPS, GSU paper0502, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  12. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February. [Downloadable!] (restricted)
  13. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October. [Downloadable!] (restricted)
  14. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September. [Downloadable!] (restricted)
  15. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December. [Downloadable!] (restricted)
  16. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, 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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