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Tax competition and tax base equalization in the presence of multiple tax instruments

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  • Mutsumi Matsumoto

    (Nagoya University)

Abstract

The literature on tax competition has argued that tax base equalization, which reduces regional disparities in tax bases, can serve as a means of internalizing horizontal and vertical fiscal externalities. This argument assumes that each government relies on a single tax base (a regional tax on mobile capital and a federal tax on savings). This paper considers the case in which a distortionary labor tax is also available. Internalizing fiscal externalities requires that while the regional capital tax base is fully equalized, a region’s equalization entitlement for the labor tax is positive when its tax base is “larger” than the average tax base of all regions. This efficient tax base equalization system is incompatible with the primary objective of fiscal equalization.

Suggested Citation

  • Mutsumi Matsumoto, 2022. "Tax competition and tax base equalization in the presence of multiple tax instruments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1213-1226, October.
    • Handle: RePEc:kap:itaxpf:v:29:y:2022:i:5:d:10.1007_s10797-021-09703-z
    DOI: 10.1007/s10797-021-09703-z
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    Cited by:

    1. Mutsumi Matsumoto & Hikaru Ogawa, 2023. "Corporate income tax competition and efficient tax base equalization," Economics of Governance, Springer, vol. 24(1), pages 109-118, March.

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