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Apportionment, Fiscal Equalization and Decentralized Tax EnforcementChristian TraxlerUniversity 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) Andreas ReutterUniversity of Konstanz - Department of Economics April 2008 MPI Collective Goods Preprint, No. 2008/21 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.
Number of Pages in PDF File: 27 Keywords: Tax Enforcement, Tax Evasion, Formula Apportionment, Fiscal Equalization, Tax Revenue Sharing JEL Classification: H77, H71, H26 working papers seriesDate posted: July 15, 2008 ; Last revised: December 2, 2008Suggested CitationContact Information
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