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Decentralization and Tax Competition between Asymmetrical Local Governments


  • Clément Carbonnier

    () (Université de Cergy-Pontoise, THEMA, Cergy-Pontoise cedex, France & Sciences Po, LIEPP, Paris, France)


This article presents a model of tax competition between an arbitrarily large number of asymmetrical jurisdictions. Tax competition induces lower corporate taxes and lower public input provision than does tax coordination. This bias decreases with respect to the size and number of jurisdictions. Tax competition constitutes a cost of decentralization that may balance the gains presented by the decentralization theorem. A French panel of municipalities and intermunicipal jurisdictions is used to test these results, which are confirmed. Furthermore, the corporate tax increase due to cooperation leads to an increase in the corporate tax base: the fully decentralized situation is suboptimal.

Suggested Citation

  • Clément Carbonnier, 2013. "Decentralization and Tax Competition between Asymmetrical Local Governments," Public Finance Review, , vol. 41(4), pages 391-420, July.
  • Handle: RePEc:sae:pubfin:v:41:y:2013:i:4:p:391-420

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    References listed on IDEAS

    1. Peralta, Susana & van Ypersele, Tanguy, 2006. "Coordination of capital taxation among asymmetric countries," Regional Science and Urban Economics, Elsevier, vol. 36(6), pages 708-726, November.
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    3. Barankay, Iwan & Lockwood, Ben, 2007. "Decentralization and the productive efficiency of government: Evidence from Swiss cantons," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1197-1218, June.
    4. Matthieu Leprince & Thierry Madiès & Sonia Paty, 2007. "Business Tax Interactions Among Local Governments: An Empirical Analysis Of The French Case," Journal of Regional Science, Wiley Blackwell, vol. 47(3), pages 603-621.
    5. Schwab, Robert M. & Oates, Wallace E., 1991. "Community composition and the provision of local public goods : A normative analysis," Journal of Public Economics, Elsevier, vol. 44(2), pages 217-237, March.
    6. Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 983-1028, December.
    7. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, vol. 89(7), pages 1157-1189, July.
    8. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
    9. 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.
    10. Todd M. Gabe & Kathleen P. Bell, 2004. "Tradeoffs between Local Taxes and Government Spending as Determinants of Business Location," Journal of Regional Science, Wiley Blackwell, vol. 44(1), pages 21-41.
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    Cited by:

    1. Elisabeth Gugl & George R. Zodrow, 2014. "The Efficiency of “Benefit-Related” Business Taxes," Working Papers 1406, Oxford University Centre for Business Taxation.
    2. Ida, Tomoya & Wilhelmsson, Mats, 2014. "An Empirical Test Of The Dominant Tax Externality In Sweden," Working Paper Series 14/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin).


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