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Competing in taxes and investment under fiscal equalization

Author

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  • Jean, HINDRIKS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

  • Susana, PERALTA

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

  • Sholmo, WEBER

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

Abstract

The paper considers a model of a 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. The regions’ choices determine the 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 for the federation and, provided that the degree of asymmetry is small, for each region as well.

Suggested Citation

  • Jean, HINDRIKS & Susana, PERALTA & Sholmo, WEBER, 2006. "Competing in taxes and investment under fiscal equalization," Discussion Papers (ECON - Département des Sciences Economiques) 2006062, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:2006062
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous Regions; Fiscal Federalism; Fiscal equalization; 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
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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