Apportionment, Fiscal Equalization and Decentralized Tax Enforcement

27 Pages Posted: 15 Jul 2008 Last revised: 2 Dec 2008

See all articles by Christian Traxler

Christian Traxler

Hertie School; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Reutter

University of Konstanz - Department of Economics

Date Written: April 2008

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.

Keywords: Tax Enforcement, Tax Evasion, Formula Apportionment, Fiscal Equalization, Tax Revenue Sharing

JEL Classification: H77, H71, H26

Suggested Citation

Traxler, Christian and Reutter, Andreas, Apportionment, Fiscal Equalization and Decentralized Tax Enforcement (April 2008). MPI Collective Goods Preprint, No. 2008/21, Available at SSRN: https://ssrn.com/abstract=1160175 or http://dx.doi.org/10.2139/ssrn.1160175

Christian Traxler (Contact Author)

Hertie School ( email )

Friedrichstrasse 180
Quartier 110
Berlin, 10117
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

Andreas Reutter

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

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