Equalizing tax bases or tax revenues under tax competition? The role of formula apportionment

Abstract

This paper contributes to the literature on fiscal equalization and corporate tax competition. The innovation is that we explicitly model multinational enterprises and a corporate tax system that is designed according to formula apportionment. Two main results are obtained. First, in contrast to previous studies we identify cases where tax revenue equalization is better in mitigating detrimental tax competition than tax base equalization. Second, tax base equalization nevertheless has the advantage that it may render tax rates efficient, depending on the shape of the apportionment formula. A pure payroll formula does not ensure efficiency, but a back‐of‐the‐envelope calibration of our model to Canadian provinces suggests that a pure sales formula may be optimal.

Taxes, R&D Expenditures, and Open Innovation: Analyzing OECD Countries

“…The econometric results showed that innovation is needed to strengthen the institutional structure of economic development. This result is contrary to Liesegang and Runkle [18], who studied the connection that taxation has with innovation and institutional quality more closely, revealing the shortcomings.…”

Commuting in Happyville: Taxation with interjurisdictional commuting and pollution

“…A standard result in the literature is that tax competition reduces aggregate welfare; however it may be beneficial for one jurisdiction when they are asymmetric and some production factor is mobile. Bucovetsky () or Wilson () analyze capital mobility and highlight a “small region advantage.” Liesegang and Runkel () analyze the capacity of fiscal competition to internalize the pecuniary and fiscal externalities associated with fiscal competition. They identify cases where tax revenue equalization is more efficient than tax base equalization.…”