The Weighting Game: Formula Apportionment as an Instrument of Public Policy

Posted: 26 Jun 2000

See all articles by Bharat N. Anand

Bharat N. Anand

Harvard University - Strategy Unit

Richard C. Sansing

Tuck School of Business at Dartmouth

Abstract

We propose an explanation for why states choose different apportionment formulas for corporate income tax purposes. Based on a two-state equilibrium model of location choice by firms, we show that aggregate social welfare is maximized when both states use the same formula, regardless of which formula is chosen. However, at least one of the states can increase its welfare by deviating from this coordinated solution; thus, the Nash equilibrium features the states choosing different formulas. Importing states have incentives to increase the sales factor, whereas exporting states will tend to increase the input factors. An empirical test of which states have deviated from the traditionally equally-weighted three factor formula supports the predictions of the model.

JEL Classification: H25, H71

Suggested Citation

Anand, Bharat N. and Sansing, Richard C., The Weighting Game: Formula Apportionment as an Instrument of Public Policy. National Tax Journal, Vol. 53, Issue 2, June 2000. Available at SSRN: https://ssrn.com/abstract=228884

Bharat N. Anand (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Richard C. Sansing

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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