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Fiscal Equalization, Tax Salience, and Tax Competition

  • Martin Altemeyer-Bartscher

Jurisdictions that engage in inter-regional tax competition usually try to attenuate competitive pressures by substituting salient tax instruments with hidden ones. On this effect, we investigate the efficiency consequences of inter-regional tax competition and fiscal equalization in a federal system when taxpayers fail to optimally react on shrouded attributes of local tax policy. If the statuary tax rate is a relatively salient instrument and taxpayers pay low attention to the quality and the frequency of tax enforcement, the underlying substitution of tax instruments with the aim of reducing the perceived tax price may suppress the under-exploitation of tax bases that is typically triggered by fiscal equalization.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 3.

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Date of creation: Mar 2014
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Handle: RePEc:iwh:dispap:3-14
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  1. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
  2. Charles Christian & Joel Slemrod & Marsha Blumenthal, 2001. "Taxpayer response to an increased probability of audit: Evidence from a controlled experiment in minnesota," Natural Field Experiments 00332, The Field Experiments Website.
  3. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  4. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
  5. Emanuele Bracco & Francesco Porcelli & Michela Redoano, 2013. "Political Competition, Tax Salience and Accountability: Theory and Some Evidence from Italy," CESifo Working Paper Series 4167, CESifo Group Munich.
  6. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  7. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  8. Amy Finkelstein, 2007. "E-ZTax: Tax Salience and Tax Rates," NBER Working Papers 12924, National Bureau of Economic Research, Inc.
  9. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
  10. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  11. 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.
  12. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer, vol. 9(4), pages 391-408, August.
  13. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
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