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Competing in taxes and investment under fiscal equalization

  • Hindriks, Jean
  • Peralta, Susana
  • Weber, Shlomo

The paper considers a model of 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. Regions' choices determine 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, R., Flatters, F., 1982. Efficiency and equalization payments in a federal system of government: a synthesis and extension of recent results, Canadian Journal of Economics 15, 613-633; Weingast, B.R., 2006. Second Generation Fiscal Federalism: Implication for Decentralized Democratic Governance and Economic Development, Working Paper, Hoover Institution, Stanford University]. 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 not only for the federation and, under a low degree of regional asymmetry, also for each region.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 12 (December)
Pages: 2392-2402

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:12:p:2392-2402
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR).
  2. Jean Hindriks & Gareth D. Myles, 2000. "Strategic Inter-Regional Transfers," Working Papers 417, Queen Mary University of London, School of Economics and Finance.
  3. 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.
  4. Thiess Buettner, 2005. "The Incentive Effect of Fiscal Equalization Transfers on Tax Policy," CESifo Working Paper Series 1404, CESifo Group Munich.
  5. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
  6. 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;International Institute of Public Finance, vol. 9(6), pages 631-649, November.
  7. Hindriks, Jean & Myles, Gareth D., 2013. "Intermediate Public Economics," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262018691, March.
  8. FIGUIÈRES, Charles & HINDRIKS, Jean & MYLES, Gareth D., . "Revenue sharing versus expenditure sharing in a federal system," CORE Discussion Papers RP 1683, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. 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.
  10. Hehui Jin & Yingyi Qian & Barry Weingast, 1999. "Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style," Working Papers 99013, Stanford University, Department of Economics.
  11. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  12. 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.
  13. Shah, Anwar, 2004. "Fiscal decentralization in developing and transition economies: progress, problems, and the promise," Policy Research Working Paper Series 3282, The World Bank.
  14. Hongbin Cai & Daniel Treisman, 2005. "Does Competition for Capital Discipline Governments? Decentralization, Globalization, and Public Policy," American Economic Review, American Economic Association, vol. 95(3), pages 817-830, June.
  15. 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.
  16. von Hagen, Jürgen & Hepp, Ralf, 2000. "Regional risksharing and redistribution in the German federation," ZEI Working Papers B 15-2000, University of Bonn, ZEI - Center for European Integration Studies.
  17. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 391-408, August.
  18. Keen, M. & Marchand, M., . "Fiscal competition and the pattern of public spending," CORE Discussion Papers RP 1284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  19. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  20. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
  21. FIGUIÈRES, Charles & HINDRIKS, Jean & MYLES, Gareth D., 2001. "Revenue sharing versus expenditure sharing," CORE Discussion Papers 2001015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  22. Andrei Shleifer, 1996. "Government in Transition," Harvard Institute of Economic Research Working Papers 1783, Harvard - Institute of Economic Research.
  23. 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.
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