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Tax competition and fiscal equalization under corporate income taxation

Caterina Liesegang () and Marco Runkel ()
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Caterina Liesegang: University of Technology Berlin

International Tax and Public Finance, 2018, vol. 25, issue 2, No 1, 324 pages

Abstract: 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.

Keywords: Corporate income taxation; Tax competition; Fiscal equalization (search for similar items in EconPapers)
JEL-codes: H25 H71 H77 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10797-017-9451-6

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