Competing in taxes and investment under fiscal equalization

Jean Hindriks, Susana Peralta () and Shlomo Weber ()

Journal of Public Economics, 2008, vol. 92, issue 12, 2392-2402

Abstract: The paper considers a model of 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. Regions' choices determine 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, R., Flatters, F., 1982. Efficiency and equalization payments in a federal system of government: a synthesis and extension of recent results, Canadian Journal of Economics 15, 613-633; Weingast, B.R., 2006. Second Generation Fiscal Federalism: Implication for Decentralized Democratic Governance and Economic Development, Working Paper, Hoover Institution, Stanford University]. 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 not only for the federation and, under a low degree of regional asymmetry, also for each region.

Keywords: Heterogeneous; regions; Fiscal; federalism; Fiscal; equalization; Public; investments (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (105)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0047-2727(07)00207-1
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Competing in Taxes and Investment under Fiscal Equalization (2007)
Working Paper: Competing in taxes and investment under fiscal equalization (2006)
Working Paper: Competing in taxes and investment under fiscal equalization (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:92:y:2008:i:12:p:2392-2402

Access Statistics for this article

Journal of Public Economics is currently edited by R. Boadway and J. Poterba

More articles in Journal of Public Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().