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Formula Apportionment, Tax Competition, and the Provision of Local Goods

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  • Santiago Pinto

    ()
    (Federal Reserve Bank of Richmond)

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    Abstract

    The paper develops an analytical framework where regional governments strategically determine the structure of the corporate profit tax system and profits are regionally allocated using an apportionment formula. Two important results emerge in a symmetric Nash equilibrium: (i) investment decisions are distorted, i.e., regional governments will not allow complete deduction of capital costs from taxable corporate profits; and (ii) there is underprovision of the good provided by the regional government, consistent with the literature on property tax competition. The paper also shows that the degree of underprovision may be less severe when the formula employs sales shares to apportion corporate profits. The model allows us to presume that the recent shift by most states in the U.S. towards a formula apportionment that gives a higher weight to the sales proportion may constitute a welfare improvement for all regions, compared to the original formula that weighs all factors equally.

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    File URL: http://rri.wvu.edu/wp-content/uploads/2012/11/pintowp2005-3.pdf
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    Bibliographic Info

    Paper provided by Regional Research Institute, West Virginia University in its series Working Papers with number 200503.

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    Length: 18 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:rri:wpaper:200503

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    Web page: http://rri.wvu.edu/research/working-papers/
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    Related research

    Keywords: apportionment; tax competition; local goods; macroeconomics; regional development;

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    1. Jan K. Brueckner & Luz A. Saavedra, 2000. "Do Local Governments Engage in Strategic Property-Tax Competition?," Econometric Society World Congress 2000 Contributed Papers 0357, Econometric Society.
    2. Klassen, Kenneth J. & Shackelford, Douglas A., 1998. "State and provincial corporate tax planning: income shifting and sales apportionment factor management," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 385-406, June.
    3. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November.
    4. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
    5. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-25, April.
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