Assessing the Normative Differences Between Formula Apportionment and Separate Accounting

  • Thomas A. Gresik
Part of the MPI Studies in Tax Law and Public Finance book series (MPISTUD, volume 1)


Formula apportionment and transfer pricing are the two common responses by governments to the problem of apportioning the income of multi-state businesses in order to calculate state by state tax liabilities. This paper grounds the current debate over the efficacy of these two methods by arguing first, that the fundamental differences are due to adverse selection and moral hazard problems, and second, that the fundamental economic differences are tied to how each method influences firm investment and output decisions. In this context, each method for apportioning corporate income to each state generates its own set of economic inefficiencies. This paper argues for the importance of a normative comparison of formula apportionment and transfer pricing to assess their economic inefficiencies and describes some recent research that quantifies the differences between these two methods.


Transfer Price Multinational Firm Separate Accounting Final Good Production Intermediate Good Production 
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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Thomas A. Gresik
    • 1
  1. 1.University of Notre DameNotre DameFrance

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