Heterogeneous capital tax competition in a federation with asymmetric tax compliance

Lisa Grazzini and Petretto Alessandro ()
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Petretto Alessandro: Department of Economics and Management, University of Florence, Via delle Pandette 9, 50127 Florence, Italy

German Economic Review, 2022, vol. 23, issue 4, 669-705

Abstract: In a federal country with two regions, consumers can decide not only the region where to invest, but also the type of capital investment. We analyse how such decision is affected by the fact that a first type of capital is taxed at a regional level while a second one is taxed at a federal level with tax compliance for federal taxation varying across regions. A standard horizontal tax competition arises for the first type of capital across regions. Instead, vertical tax competition arising between the regional and the federal level is not standard because there is not tax base overlap between the two tiers of government. However, both regional and federal tax bases are affected by tax policies decided by each level of government via capital movements from one type of capital towards the other one. Our main result shows under which conditions an increase in federal taxation in response to an increase in tax noncompliance may be less severe than in a set-up with only one type of capital because of capital flights arising not only across regions, but also across different types of capital investment.

Keywords: Fiscal federalism; Tax Competition; Tax Compliance (search for similar items in EconPapers)
JEL-codes: H2 H41 H71 H77 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/ger-2021-0103

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