Profit Tax Competition and Formula Apportionment

37 Pages Posted: 24 Aug 2003

See all articles by Rudiger Pethig

Rudiger Pethig

University of Siegen - School of Economic Disciplines; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Wagener

Leibniz Universit├Ąt Hannover - Economics and Business Administration Area; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Vienna University of Economics and Business Administration

Date Written: August 2003

Abstract

We analyse tax competition with corporate income taxes in a common market where tax revenues are allocated according to an apportionment formula. Generally, tax competition is sharper (i.e., equilibrium tax rates are lower) the more tax-elastic is the apportionment formula. This depends on the properties of production technologies. In particular: (i) With fixed labour input, tax competition is sharpest if apportionment is based on property-shares, followed by the sales- and payroll-shares. (ii) If capital and labour are endogenous and technologies are Cobb-Douglas, tax competition under the property- and the payroll-share rule is sharper than under the sales-share formula. Factor elasticities determine whether payroll- or property-share apportionment generates sharper tax competition.

Keywords: tax competition, formula apportionment

JEL Classification: D81, D21

Suggested Citation

Pethig, Rudiger and Wagener, Andreas, Profit Tax Competition and Formula Apportionment (August 2003). CESifo Working Paper Series No. 1011, Available at SSRN: https://ssrn.com/abstract=436606

Rudiger Pethig

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Andreas Wagener (Contact Author)

Leibniz Universit├Ąt Hannover - Economics and Business Administration Area ( email )

Koenigsworther Platz 1
30167 Hannover
Germany

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

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Vienna University of Economics and Business Administration ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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