Apportionment, Fiscal Equalization and Decentralized Tax Enforcement
University of Marburg - Department of Economics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
University of Konstanz - Department of Economics
MPI Collective Goods Preprint, No. 2008/21
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.
Number of Pages in PDF File: 27
Keywords: Tax Enforcement, Tax Evasion, Formula Apportionment, Fiscal Equalization, Tax Revenue Sharing
JEL Classification: H77, H71, H26working papers series
Date posted: July 15, 2008 ; Last revised: December 2, 2008
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.735 seconds