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Risk sharing and the efficiency of public good provision under tax competition

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  • Kalamov, Zarko Y.

Abstract

This paper investigates tax competition under uncertainty, when local governments levy a linear source-based tax on corporate income. As the corporate tax transfers part of the risk of investment from firms to the government (risk sharing), two differences to the previous literature arise. First, the capital mobility externality may be positive or negative, depending on how strong the risk sharing effect of taxation is. Second, the sign of the tax exporting externality is also indeterminate. Each government not only exports the burden of taxation, but also bears risk which would have been borne by foreigners instead. Thus, while the socially optimal tax rate equates the risk exposure of the private and the public sectors, the equilibrium decentralized tax may be inefficiently high or low.

Suggested Citation

  • Kalamov, Zarko Y., 2013. "Risk sharing and the efficiency of public good provision under tax competition," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 676-683.
  • Handle: RePEc:eee:regeco:v:43:y:2013:i:4:p:676-683
    DOI: 10.1016/j.regsciurbeco.2013.03.002
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    References listed on IDEAS

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    Cited by:

    1. Ogawa, Hikaru & Wang, Wenming, 2016. "Asymmetric tax competition and fiscal equalization in a repeated game setting," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 1-10.

    More about this item

    Keywords

    Tax competition; Uncertainty; Risk sharing;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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