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Apportionment, Fiscal Equalization and Decentralized Tax Enforcement

Christian Traxler and Andreas Reutter
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Andreas Reutter: University of Konstanz

No 2008_21, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: We study tax evasion and decentralized tax enforcement in a federal economy with mobile capital and the endogenous formation of multiregional companies. Regions use their enforcement policy as a strategic instrument to engage in fiscal competition. Within this framework, we analyze the uncoordinated policy choice under formula apportionment (FA) and compare it to the incentives which derive from fiscal equalization (FE). As both systems redistribute collected revenues but not enforcement costs, they distort the regions' incentives to enforce taxes. At the same time, jurisdictions partially internalize the fiscal externalities caused by their enforcement policy. We show that the tradeoff between these two opposing effects differs between FA and FE, and crucially depends on the degree of interregional firm integration under FA. We discuss conditions under which FA, FE or a joint system of FA cum FE provides the ‘best’ incentives for decentralized tax enforcement.

Keywords: Tax Enforcement; Tax Evasion; Formula Apportionment; Fiscal Equalization; Tax Revenue Sharing (search for similar items in EconPapers)
JEL-codes: H26 H71 H77 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2008-04
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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