Risk sharing and the efficiency of public good provision under tax competition

Zarko Kalamov

Regional Science and Urban Economics, 2013, vol. 43, issue 4, 676-683

Abstract: This paper investigates tax competition under uncertainty, when local governments levy a linear source-based tax on corporate income. As the corporate tax transfers part of the risk of investment from firms to the government (risk sharing), two differences to the previous literature arise. First, the capital mobility externality may be positive or negative, depending on how strong the risk sharing effect of taxation is. Second, the sign of the tax exporting externality is also indeterminate. Each government not only exports the burden of taxation, but also bears risk which would have been borne by foreigners instead. Thus, while the socially optimal tax rate equates the risk exposure of the private and the public sectors, the equilibrium decentralized tax may be inefficiently high or low.

Keywords: Tax competition; Uncertainty; Risk sharing (search for similar items in EconPapers)
JEL-codes: H25 H71 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:43:y:2013:i:4:p:676-683

DOI: 10.1016/j.regsciurbeco.2013.03.002

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