Competing in Taxes and Investment under Fiscal Equalization

CORE Discussion Paper No. 2006/109

14 Pages Posted: 14 Mar 2007

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: December 2006

Abstract

The paper considers a model of a 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. The regions' choices determine the 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 for the federation and, provided that the degree of asymmetry is small, for each region as well.

Keywords: Heterogeneous Regions, Fiscal Federalism, Fiscal equalization, Public Investments

JEL Classification: C72, H23, H70

Suggested Citation

Hindriks, Jean and Peralta, Susana and Weber, Shlomo, Competing in Taxes and Investment under Fiscal Equalization (December 2006). CORE Discussion Paper No. 2006/109, Available at SSRN: https://ssrn.com/abstract=970907 or http://dx.doi.org/10.2139/ssrn.970907

Jean Hindriks (Contact Author)

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

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7882 7807 (Phone)
+44 20 8983 3580 (Fax)

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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