Agglomeration,tax competition,and fiscal equalization

This paper analyzes the impact of fiscal equalization on asymmetric tax competition when positive agglomeration externalities are present. It uses a model focusing on the strategic reason for capital taxes to demonstrate that per capita fiscal capacity equalization improves the spatial allocation of capital provided a sufficiently rich (marginally) larger region and sufficiently strong agglomeration externalities. If tax revenue is used to finance public goods, per capita fiscal capacity equalization generally cannot simultaneously eliminate public good inefficiency and spatial inefficiency. However, the achievement of full efficiency for ex ante identical regions requires excessive (full) equalization in the presence (absence) of agglomeration externalities.     

Federal tax competition and the efficiency consequences for local taxation of revenue equalization

Recent work has shown that a system of equalization grants can neutralize the efficiency loss caused by tax competition among lower-level governments. These models, however, ignore the vertical tax externalities that occur when the federal and lower-level governments levy taxes on the same base. This paper incorporates equalization grants into a standard capital tax competition model in which there are horizontal tax externalities between jurisdictions and vertical tax externalities between the levels of government. It is shown that, even in the presence of vertical tax externalities, an efficient level of lower-level government taxation can be achieved with a modifying version of a standard equalization grant formula.     

Tax competition and fiscal equalization under corporate income taxation

This paper challenges the view that tax base equalization by the so-called representative tax system (RTS) removes inefficient undertaxation in corporate tax competition. The innovation of the paper is that it focuses on a tax on corporate income, instead of the unit tax on capital considered in previous studies. We employ a tax competition model with fiscal equalization and show that the RTS fails to fully internalize pecuniary and fiscal externalities. As a consequence, the RTS yields inefficiently low tax rates in the Nash equilibrium of the tax competition game between governments. Tax revenue equalization performs even worse, but combined with equalization of private income it implements the efficient tax rates on corporate income.     

Tax Competition and Fiscal Equalization

This paper analyzes the relation between tax competition and fiscal equalization. In particular, it asks the question whether fiscal equalization schemes can mitigate inefficient tax competition. Two transfer schemes are considered: tax revenue and tax base equalization schemes. The paper shows that equalizing transfers may internalize fiscal externalities. In particular, in a small open economy tax base equalization yields efficient tax rates. Thus, transfer mechanisms with an explicit redistributive character do not always impair efficiency.     

Why hasn’t tax competition triggered a race to the bottom? Some quantitative lessons from the EU

The integration of European financial markets in the early 1980s created an environment of near-perfect capital mobility across countries that had harmonized indirect taxes but maintained large differences in factor taxes. The years that followed witnessed several rounds of competition in capital taxes with puzzling results. Instead of the dreaded “race to the bottom” in capital taxes, the UK lowered its capital tax to a rate closer to those of France, Germany and Italy, while capital taxes changed slightly in these countries. The UK increased its labor tax marginally, but the other countries increased theirs sharply. This paper shows that these results are consistent with the quantitative predictions of a dynamic, Neoclassical general equilibrium model of tax competition that incorporates the key international externalities of tax policy operating via relative prices, wealth distribution and fiscal solvency. Tax competition is modeled as a one-shot game over time-invariant capital taxes with dynamic payoffs relative to a status quo calibrated to European data. The calibration is preceded by an empirical analysis that shows that the relationship linking taxes to labor supply and the investment rate in the model are in line with empirical evidence and that domestic taxes seem to respond to foreign taxes. The solutions of the games show that when countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency, there is no race to the bottom and the Nash equilibrium is close to observed taxes. In contrast, if consumption taxes adjust to maintain fiscal solvency, competition over capital taxes triggers a “race to the bottom,” but this outcome entails large welfare gains. Surprisingly, the gains from coordination are small in all of these experiments.     

Tax Evasion and Auditing in a Federal Economy

This paper analyzes the relation between tax auditing and fiscal equalization in the context of fiscal competition. We incorporate a model of tax evasion by firms into a standard tax competition framework where regional governments use their audit rates as a strategic instrument to engage in fiscal competition. We compare the region’s choice of audit policies for three different cases: A scenario of unconfined competition without interregional transfers, a scenario with a gross revenue equalization (GRS) scheme and finally, a scenario with net revenue sharing (NRS), where not only the revenues from taxation but also the regions auditing costs are shared. Without regional transfers, fiscal competition leads to audit rates which are inefficiently low for revenue-maximizing governments. While in general GRS aggravates the inefficiency, NRS makes the decentralized choice of auditing policies more efficient.JEL Code: H26, H71, H77     

MIGRATION into the WELFARE STATE: tax and migration competition

Despite big gains from easing restrictions on international labor mobility, liberalizing migration flows is not pursued unilaterally or negotiated among countries in a way that international trade negotiations are pursued. Among several key explanations is the fiscal burden imposed by immigration on native-born. The paper focuses on a central tension faced by policy makers in countries that receive migrants from lower wage countries. Such countries are typically high productivity and capital rich, and the resulting high wages attract both skilled and unskilled migrants. A generous welfare state may attract low-skill migration deter skilled migration, since it is likely to be accompanied by higher redistributive taxes. Assuming that a group of host countries faces an upward supply of immigrants, the analysis demonstrates that tax competition does not indeed lead to a race to the bottom; competition may lead to higher taxes than coordination. There exists a fiscal externality (fiscal leakage) that causes tax rates (on both labor and capital), and the volume of migration (of both skill types), to be higher in the competitive regime than in the coordinated regime.     

Capital tax competition and social security

The classic capital tax policy externality is studied in the presence of a social security program where both the benefits and taxes depend on wages in an overlapping generations economy with many countries and mobile capital. We study the response and welfare implications of a coordinated capital tax rate increase across countries competing for the mobile tax base on the initial generations, the transition, and the steady state. The tax increase is initially completely capitalized, but some of the burden is shifted to labor on the transition path and in the steady state. Several new welfare effects are uncovered including an effect involving the parameters of the social security program. Sufficient conditions are provided so that all current and future generations are better off from the reform. However, social security may reduce the gain to capital tax reform.     

Tax enforcement and tax havens under formula apportionment

In this paper, we consider optimal tax enforcement policy in the presence of profit shifting toward tax havens. We show that, under separate accounting, tax enforcement levels may be too high due to negative fiscal externalities. In contrast, under formula apportionment, tax enforcement is likely to be too low due to positive externalities of tax enforcement. Our results challenge recent contributions arguing that, under formula apportionment, there is a tendency toward inefficiently high levels of (effective) tax rates.     

财政压力、企业要素投入扭曲与经济绩效

本文利用中国取消农业税改革作为准自然实验,探讨区县级政府财政压力对政府决策和微观企业资源配置的影响,进而分析由此带来的宏观经济绩效影响效应。研究发现:地方政府行为受到财政压力的影响,农业税改革带来的财政压力使企业资本要素投入的边际收益和边际成本的缺口上升5.72%,企业资本要素投入不足情况加剧,而对劳动要素投入的影响并不显著;进一步的机制分析表明,财政压力对企业资本要素投入的扭曲效应更多源于税收征管提高、环境规制放松、交易费用增加和企业规模分布变异,这一干扰效应最终导致经济总量生产率平均下降约19.32%。     

Asymmetric capital tax competition and choice of tax rate

This article provides an alternative mechanism that explains differences in capital tax rates, which applies to small jurisdictions. In the framework of standard capital tax competition models, regions have to be large, in the sense of having market power, otherwise they will tax capital, a mobile factor, at the same rate. In this paper, we consider a second mobile factor, labor, which is mobile only within metropolitan areas. We will show that this spatially limited mobile factor may explain the capital tax rate differences levied on the global mobile factor as long as no source-based wage tax is available. In addition to the theoretical treatment, numerical simulations also confirm this result and show a significant tax differential.     

Does competition for capital discipline governments? The role of fiscal equalization

This paper examines how a fiscal equalization system affects the disciplining effect of competition for capital among heterogeneous regions in a decentralized economy. I build a model in which regions that are heterogeneous in initial endowments try to attract capital by competing public input that enhances the productivity of capital; meanwhile, a fiscal equalization system is imposed by the central government to reduce regional disparities in fiscal capacity. The key prediction, borne out in data from the German equalization system, is that while competition for capital strengthens discipline in the well-endowed regions, it weakens discipline in the poorly endowed regions. However, a conventional equalization transfer scheme, common to many countries, can be effective in correcting the distortion driven by the heterogeneity of initial endowments across competing regions.     

Sickness absence and health care in an economic federation

This paper addresses vertical fiscal externalities in a model where the state governments provide health care and the federal government provides a sickness benefit. Both levels of government tax labor income and policy decisions affect labor income as well as participation in the labor market. The results show that the vertical externality affecting the state governments’ policy decisions can be either positive or negative depending on, among other things, the wage elasticity of labor supply and the marginal product of expenditure on health care. Moreover, it is proved that the vertical fiscal externality will not vanish by assigning all powers of taxation to the states.      

Optimal Fiscal and Monetary Policy in Customer Markets

We present a model in which some goods trade in “customer markets” and advertising facilitates long‐lived relationships. We estimate the model on U.S. data and find a large congestion externality in the pricing of customer market goods. This motivates the analysis of optimal policy. Under a complete set of taxes, fiscal policy eliminates the externalities with large adjustments in tax rates on customer markets goods, while labor tax volatility remains low. Constraining the instruments to the interest rate and labor tax, the optimal labor tax displays large and procyclical fluctuations, but monetary policy is little changed compared to a model with no customer markets.     

Interjurisdictional Tax Competition in a Federal System of Overlapping Revenue Maximizing Governments

Academic literature in public finance has focused on interjurisdictional tax competition—namely among similar types of local governments—but has leaved vertical externalities arising from interactions between two overlapping governments sharing the same tax base aside. The purpose of this paper is to provide a simple model within which interjurisdictional tax competition and vertical interactions between two overlapping governments that share the same tax base can be analyzed simultaneously. We find that interjurisdictional tax competition reduces the global tax rate set by both overlapping governments (federal and local) but is unable to solve completely the distortion arising from vertical externalities. The model is also extended to allow for government subsidies to industrial capital. We give sufficient conditions for capital subsidies to be more efficient to attract capital when they are granted at a federal level rather than at a local level.     

A Note on Intertemporal Fiscal Competition and Redistribution

This paper studies fiscal competition among jurisdictions in a dynamic framework, where the degree of mobility of private capital across jurisdictions boundaries is perfect. The optimal tax on mobile capital is a source tax that taxes away factor rents. Further we show that taxation of mobile capital can redistribute income in favor of the immobile factor labor. This is because the factor rents generated by public inputs and appropriated by mobile capital exceed the efficient level of public expenditure for investments. JEL Code: H21, H23, H42, H71     

The revenue and base effects of local tax hikes: evidence from a quasi-experiment

Due to a reform of the local equalization scheme in 2003, a set of municipalities in the German state of North Rhine-Westphalia (NRW) increased their local property and business tax rates by one to two percentage points, while the remaining municipalities kept their rates constant. I use this variation across municipalities and over time to study the revenue and base effects of local property and business tax hikes in a generalized difference-in-differences design. The results suggest that the property tax hikes had even in the long-run a revenue elasticity of unity. Accordingly, I find no adverse effects on property tax bases. For the business tax, I find no significant effects on revenues and bases. Furthermore, there are also no effects on broader economic outcomes such as local employment, firms’ wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.

     

An index of capital tax competition

If very specific assumptions are made about the production technology (output per worker is a quadratic function of the capital/labor ratio), people’s preferences (identical within any jurisdiction; linear in private good consumption and in public expenditure per capita), and capital supply (fixed), then equilibrium tax rates can be derived in closed form when jurisdictions choose their source-based tax rates on capital noncooperatively. The focus of this paper is how the size distribution of the population of the different jurisdictions affects equilibrium tax rates. It is shown that the (population-weighted) average tax rate is determined by a (relatively) simple index, which must increase as the population distribution becomes more concentrated. The effects of tax harmonization by some subset of the jurisdictions can then be analyzed. Any tax harmonization by a group of jurisdictions must benefit residents of all jurisdictions not in the group. It must also benefit residents of the largest jurisdiction in the group, and must increase the average payoff of all residents of the group of jurisdictions doing the harmonizing.     

A growth oriented dual income tax

This paper proposes a growth oriented dual income tax by combining an allowance for corporate equity with a broadly defined flat tax on personal capital income. Revenue losses are compensated by an increase in the value added tax. The paper demonstrates the neutrality properties of the reform with respect to investment, firm financial decisions and organizational choice. Tax rates are chosen to prevent income shifting from labor to capital income. The reform decisively strengthens investment of domestically owned firms as well as home and foreign based multinationals and boosts savings. Simulations with a calibrated growth model for Switzerland indicate that the reform could add between 4 to 5 percent of GNP in the long-run, depending on the specific scenario. Given the slow nature of capital accumulation, it imposes considerable costs in the short-run. We consider a tax smoothing scenario to offset the intergenerationally redistributive effects. JEL Classification: D58, D92, E62, G32, H25     

Quantifying tax effects under policy foresight

Studies of tax effects make the conventional information assumption that changes in period-t taxes become known at t. Legislative lags, however, imply that news arrives before tax changes take place. Under policy foreknowledge, the conventional information structure is therefore misspecified. Simulations of a standard neoclassical growth model suggest that foresight of only one quarter can distort substantially the estimates of tax effects obtained under the no-foresight assumption. Also, it is crucial to model capital and labor taxes separately: anticipated changes in these two tax policies have opposite effects on consumption, investment, labor, and output before policy realization.