International Tax and Public Finance

, Volume 24, Issue 1, pp 164–178 | Cite as

Tax competition and federal equalization schemes with decentralized leadership

Policy Watch

Abstract

Regional governments compete by setting capital taxes in anticipation of the central government’s fiscal equalization and income redistribution policies. I start by demonstrating that the constrained socially optimal allocation satisfies the Pareto efficient conditions; therefore, it may be first best. It is also shown that the subgame perfect equilibrium for the game played by regional and central governments is socially optimal. The anticipation of equalization of marginal utilities of public consumption and equalization of marginal utilities of private consumption provides regional governments with correct incentives in the setting of capital taxes, preventing the phenomenon known as “race to the bottom.”

Keywords

Fiscal equalization Income redistribution Capital tax competition Decentralized leadership 

JEL Classification

D6 H2 H3 H4 H7 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of Marketing, Business Economics and LawUniversity of AlbertaEdmontonCanada

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