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Equalizing tax bases or tax revenues under tax competition? The role of formula apportionment
Author(s) -
Liesegang Caterina,
Runkel Marco
Publication year - 2019
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12319
Subject(s) - tax competition , economics , apportionment , tax reform , microeconomics , indirect tax , corporate tax , multinational corporation , value added tax , competition (biology) , tax revenue , monetary economics , public economics , tax avoidance , finance , ecology , political science , law , biology
This paper contributes to the literature on fiscal equalization and corporate tax competition. The innovation is that we explicitly model multinational enterprises and a corporate tax system that is designed according to formula apportionment. Two main results are obtained. First, in contrast to previous studies we identify cases where tax revenue equalization is better in mitigating detrimental tax competition than tax base equalization. Second, tax base equalization nevertheless has the advantage that it may render tax rates efficient, depending on the shape of the apportionment formula. A pure payroll formula does not ensure efficiency, but a back‐of‐the‐envelope calibration of our model to Canadian provinces suggests that a pure sales formula may be optimal.