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Tax competition and fiscal equalization under corporate income taxation

Author

Listed:
  • Liesegang, Caterina
  • Runkel, Marco

Abstract

This paper challenges the view that tax base equalization by the so-called representative tax system (RTS) removes inefficient undertaxation in corporate tax competition. The innovation of the paper is that it focuses on a tax on corporate income, instead of the unit tax on capital considered in previous studies. We employ a tax competition model with fiscal equalization and show that the RTS fails to fully internalize pecuniary and fiscal externalities. As a consequence, the RTS yields inefficiently low tax rates in the Nash equilibrium of the tax competition game between governments. Tax revenue equalization performs even worse, but combined with equalization of private income it implements the efficient tax rates on corporate income.

Suggested Citation

  • Liesegang, Caterina & Runkel, Marco, 2018. "Tax competition and fiscal equalization under corporate income taxation," Munich Reprints in Economics 62848, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:62848
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    Cited by:

    1. Ana B. Ania & Andreas Wagener, 2021. "Laboratory federalism with public funds sharing," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1047-1065, July.
    2. Ana B. Ania & Andreas Wagener, 2021. "Laboratory federalism with public funds sharing," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1047-1065, July.
    3. Mutsumi Matsumoto & Hikaru Ogawa, 2022. "Tax Competition and Efficient Fiscal Transfers under Capital and Labor Income Taxes," CIRJE F-Series CIRJE-F-1196, CIRJE, Faculty of Economics, University of Tokyo.
    4. 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.
    5. 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.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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