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Competing in Taxes and Investment under Fiscal Equalization

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  • Hindriks, Jean J.G.
  • Peralta, Susana
  • Weber, Shlomo

Abstract

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 and Flatters, 1982, and Weingast, 2006). 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.

Suggested Citation

  • Hindriks, Jean J.G. & Peralta, Susana & Weber, Shlomo, 2007. "Competing in Taxes and Investment under Fiscal Equalization," CEPR Discussion Papers 6431, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6431
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    More about this item

    Keywords

    equalization; fiscal; fiscal federalism; heterogeneous regions; public investments;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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