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Competing in Taxes and Investment under Fiscal Equalization

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

No 6431, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 and Flatters, 1982, and Weingast, 2006). 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: equalization; fiscal; fiscal federalism; heterogeneous regions; public investments (search for similar items in EconPapers)
JEL-codes: C72 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo, nep-pbe, nep-pub and nep-ure
Date: 2007-08
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Related works:
Journal Article: Competing in taxes and investment under fiscal equalization (2008) Downloads
Working Paper: Competing in taxes and investment under fiscal equalization (2006) Downloads
Working Paper: Competing in taxes and investment under fiscal equalization (2006) Downloads
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