TY - JOUR
T1 - Competing in taxes and investment under fiscal equalization
AU - Hindriks, Jean
AU - Peralta, Susana
AU - Weber, Shlomo
PY - 2008/12
Y1 - 2008/12
N2 - 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, R., Flatters, F., 1982. Efficiency and equalization payments in a federal system of government: a synthesis and extension of recent results, Canadian Journal of Economics 15, 613-633; Weingast, B.R., 2006. Second Generation Fiscal Federalism: Implication for Decentralized Democratic Governance and Economic Development, Working Paper, Hoover Institution, Stanford University]. 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.
AB - 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, R., Flatters, F., 1982. Efficiency and equalization payments in a federal system of government: a synthesis and extension of recent results, Canadian Journal of Economics 15, 613-633; Weingast, B.R., 2006. Second Generation Fiscal Federalism: Implication for Decentralized Democratic Governance and Economic Development, Working Paper, Hoover Institution, Stanford University]. 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.
KW - Fiscal equalization
KW - Fiscal federalism
KW - Heterogeneous regions
KW - Public investments
UR - http://www.scopus.com/inward/record.url?scp=55149095152&partnerID=8YFLogxK
U2 - 10.1016/j.jpubeco.2007.11.012
DO - 10.1016/j.jpubeco.2007.11.012
M3 - Article
AN - SCOPUS:55149095152
SN - 0047-2727
VL - 92
SP - 2392
EP - 2402
JO - Journal Of Public Economics
JF - Journal Of Public Economics
IS - 12
ER -
