Letters in Spatial and Resource Sciences

, Volume 7, Issue 1, pp 47–60 | Cite as

Asymmetric tax competition with formula apportionment

Original Paper

Abstract

This paper analyzes asymmetric tax competition under formula apportionment. It sets up a model with multinationals where two welfare-maximizing jurisdictions of different size levy source-based corporate taxes and allocate taxes using the formula approach. At the Nash equilibrium, tax rates are too low and public goods quantities are too small. The paper shows that the (marginally) larger country levies a larger tax rate compared to the smaller country. Citizens of the larger country are worse off than those of the smaller country. The larger country employs inefficiently little capital.

Keywords

Multinational enterprises Corporate taxation Formula apportionment Asymmetric tax competition 

JEL Classification

H25 H42 H73 

Notes

Acknowledgments

I have greatly benefited from the comments of the editor of this journal, Amitrajeet A Batabyal, and two anonymous reviewers.

References

  1. Anand, B., Sansing, R.: The weighting game: formula apportionment as an instrument of public policy. Natl. Tax J. 53, 183–199 (2000)Google Scholar
  2. Becker, J., Fuest, C.: Tax enforcement and tax havens under formula apportionment. Int. Tax Public Financ. 17, 217–235 (2010)CrossRefGoogle Scholar
  3. Bucovetsky, S.: Asymmetric tax competition. J. Urban Econ. 30, 167–181 (1991)CrossRefGoogle Scholar
  4. Bucovetsky, S., Wilson, J.: Tax competition with two tax instruments. Reg. Sci. Urban Econ. 21, 333–350 (1991)CrossRefGoogle Scholar
  5. Burbidge, J., Cuff, K.: Capital tax competition and returns to scale. Reg. Sci. Urban Econ. 35, 353–373 (2005)CrossRefGoogle Scholar
  6. Devereux, M., Loretz, S.: The effects of EU formula apportionment on corporate tax revenues. Fiscal Stud. 29, 1–33 (2008)CrossRefGoogle Scholar
  7. Eggert, W., Schjelderup, G.: Symmetric tax competition under formual apportionment. J. Public Econ. Theory 5, 439–446 (2003)CrossRefGoogle Scholar
  8. Eichner, T., Runkel, M.: Corporate income taxation of multinationals in a general equilibrium model. J. Public Econ. 95, 723–733 (2011)CrossRefGoogle Scholar
  9. European Commission: Company Taxation in the Internal Market (2001) (Discussion paper)Google Scholar
  10. Fuest, C.: The European Commission’s Proposal for a cmmon consolidated coporate tax base. Oxf. Rev. Econ. Policy 24, 720–739 (2008)CrossRefGoogle Scholar
  11. Fuest, C., Hemmelgarn, T., Ramb F.: How would the introduction of an EU-wide formula apportionment affect the distribution and the size of the corporate tax base? An analysis based on German Multinationals. Int. Tax Public Financ. 14, 605–626 (2007)Google Scholar
  12. Gordon, R., Wilson, J.: An examination of multijurisdictional corporate income taxation under formula apportionment. Econometrica 54, 1357–1373 (1986)CrossRefGoogle Scholar
  13. Hong, Q., Smart, M.: In praise of tax havens: international tax planning and foreign direct investment. Eur. Econ. Rev. 54, 82–95 (2010)CrossRefGoogle Scholar
  14. Hwang, H., Choe, B.: Distribution of factor endowments and tax competition. Reg. Sci. Urban Econ. 25, 655–673 (1995)CrossRefGoogle Scholar
  15. Kanbur, R., Keen, M.: Jeux Sans Frontie‘res: tax competition and tax coordination when countries differ in size. Am. Econ. Rev. 83, 877–892 (1993)Google Scholar
  16. Kolmar, M.; Wagener A.: Tax competition with formula apportionment: the interaction between tax base and sharing mechanism. CESifo Working Paper, 2097 (2007)Google Scholar
  17. Nielsen, S., Raimondos-Moeller, P.: Company taxation and tax spillovers: separate accounting versus formula apportionment. Eur. Econ. Rev. 54, 121–132 (2010)CrossRefGoogle Scholar
  18. Pethig, R., Wagener, A.: Profit tax competition and formula apportionment. Int. Tax Public Financ. 14, 631–655 (2007)CrossRefGoogle Scholar
  19. Pinto, S.: Corporate profit tax, capital mobility, and formula apportionment. J. Urban Econ. 62, 76–102 (2007)CrossRefGoogle Scholar
  20. Riedel, N., Runkel, M.: Company tax reform with a water’s edge. J. Public Econ. 91, 1533–1554 (2007)CrossRefGoogle Scholar
  21. Slemrod, J., Wilson, J.: Tax competition and parasitic tax havens. J. Public Econ. 93, 1261–1270 (2009)CrossRefGoogle Scholar
  22. Stoewhase, S.: Asymmetric capital tax competition with profit shifting. J. Econ. 85, 175–196 (2005)CrossRefGoogle Scholar
  23. Wellisch, D.: Theory of Public Finance in a Federal State. Cambridge University Press, Cambridge (2000)Google Scholar
  24. Wellisch, D: Taxation under formula apportionment—tax competition. Tax incidence, and the choice of apportionment factors. FinanzArchiv 60, 24–41 (2004)Google Scholar
  25. Wilson, J.: Tax competition with interregional differences in factor endowments. Reg. Sci. Urban Econ. 21, 423–451 (1991)CrossRefGoogle Scholar
  26. Wrede, M.: Multinational financial structure and tax competition. Swiss J. Econ. Stat., Forthcoming (2013)Google Scholar
  27. Zodrow, G., Mieszkowski, P.: Pigou, tiebout, property taxation, and the underprovision of local public goods. J. Urban Econ. 19, 356–370 (1986)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.School of Business and EconomicsUniversity of Erlangen-Nuremberg and CESifoNurembergGermany

Personalised recommendations