Competing in Taxes and Investment Under Fiscal Equalization

18 Pages Posted: 30 May 2008

See all articles by Jean Hindriks

Jean Hindriks

University of London - School of Economics and Finance

Susana Peralta

CORE-UCL; Nova School of Business and Economics

Shlomo Weber

Southern Methodist University (SMU) - Department of Economics; New Economic School

Multiple version iconThere are 2 versions of this paper

Date Written: August 2007

Abstract

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 and Flatters, 1982, and Weingast, 2006). 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.

Keywords: equalization, fiscal, fiscal federalism, heterogeneous regions, public investments

JEL Classification: C72, H23

Suggested Citation

Hindriks, Jean and Peralta, Susana and Weber, Shlomo, Competing in Taxes and Investment Under Fiscal Equalization (August 2007). CEPR Discussion Paper No. DP6431, Available at SSRN: https://ssrn.com/abstract=1138544

Jean Hindriks (Contact Author)

University of London - School of Economics and Finance ( email )

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London, E1 4NS
United Kingdom
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HOME PAGE: http://www.dc.eclipse.co.uk/hindriks.html

Susana Peralta

CORE-UCL

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~peralta/

Shlomo Weber

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3577 (Phone)
214-768-1821 (Fax)

New Economic School ( email )

Moscow
Russia
+ 7-495-9569508 (Phone)

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