Tax Competition and Efficient Fiscal Transfers under Capital and Labor Income Taxes

Mutsumi Matsumoto and Hikaru Ogawa

No CIRJE-F-1196, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper considers efficient fiscal transfer policies in a tax competition setting with ad valorem taxation (i.e., income taxation) on mobile capital and immobile labor. We show that fiscal equalization of regions’ capital income tax bases eliminates the inefficiency of horizontal tax competition if these tax bases are evaluated by the average taxable return on capital in all regions, rather than the taxable return in each region. This equalization system, together with revenue matching grants that correct vertical externalities, achieves efficiency. By investigating the nature of horizontal and vertical externalities arising from non-cooperative regional tax policies, we derive formulas for efficient fiscal transfer policies and explain their workings.

Pages: 26 pages
Date: 2022-06
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2022cf1196

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