Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada

We study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies. Because income of corporate groups is not consolidated for tax purposes in Canada, firms may use financial techniques, such as lending among affiliates, to reduce subnational corporate taxes. A simple theoretical model shows how income shifting affects real investment, government revenues, and tax base elasticities, depending on whether firms must allocate income to provinces or not. We then analyze data from administrative tax records to compare the behavior of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable income in each province. The evidence suggests that income shifting has pronounced effects on provincial tax bases. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for “income shifting” firms is 4.9, compared with 2.3 for other, comparable firms.     

The value of commitment in contests and tournaments when observation is costly

We study the value of commitment in sequential contests when the follower faces small costs to observe the leader's effort. We show that the value of commitment vanishes entirely in this class of games. By contrast, in sequential tournaments—games where, at a cost, the follower can observe the effectiveness of the leader's effort—the value of commitment is preserved completely provided that the observation costs are sufficiently small.     

Tax competition with heterogeneous firms

A model of tax competition in which firms earn rents is described. The size of these rents, coupled with the degree to which the firms are foreign-owned, determine the equilibrium tax rates. The existence of rents significantly alters some generally accepted results involving the possibility of a Pareto-improving common tax rate and the underprovision of publicly provided goods.     

Commitment and observability in a contracting environment

This paper examines leader-follower games where a leader must purchase an essential input from a price-setting supplier in order to take an action. We show that equilibrium outcomes when the followers perfectly observe the leaders' actions cannot be approximated by mixed equilibrium outcomes of the game where followers imperfectly observe the leaders' actions, i.e. they are not accessible. Accessibility fails since in a pure strategy equilibrium, a supplier makes positive profits; however in an equilibrium where a leader randomizes, supplier profits must be zero. Our result follows from a generalized indifference principle that mixed strategies must satisfy in economic environments. While supplier profits cannot be approximated, player action profiles are accessible. Our results also apply to games with costly observation.     

The Taxation of Financial Capital under Asymmetric Information and the Tax‐competition Paradox

Information sharing between governments is examined in an optimal‐taxation framework. We introduce a taxonomy of alternative systems of international capital‐income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion found in earlier literature that integration of international caopital markets may lead to the under‐provision of publicly provided goods. However, in contrast to previous results in the literature, under‐provision occurs due to inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public‐good provision as well as complete and voluntary information exchange between national tax authorities.     

Capital tax competition: bane or boon

This paper reviews potential advantages and disadvantages of capital tax competition. Tax competition may introduce, mitigate, or exacerbate inefficiencies in both the private sector and the public sector. In different models, tax competition may either limit or increase public expenditures and taxes on mobile factors, with differing welfare consequences. We also discuss the implications of tax competition for redistributive policies and for policies dealing with risk, and we identify some of the possible empirical implications of tax competition.     

地方税收效率及公平性实证研究

在现行经济及税收制度下,增值税和行为税收入比重提升会提高资本要素的产出效率;营业税和企业所得税比重的增加在提高资本要素产出效率的同时,却会降低劳动要素的产出效率;个人所得税和财产税比重提高有助于提升劳动要素的产出效率,而后者同时会降低资本产出效率;资源税类收入比重提高将会降低资本要素产出效率;流转税、所得税、行为税和财产税占税收收入比重的增加都会引起经济的总体产出的减少;我国地方税收收入具有显著的公平效应,其中所得税和财产税的公平效应相对更强,资源税及增值税也具有明显的公平收入分配的作用。     

Designing tax policy in federalist economies: An overview

The emerging economic federations of the European Union, Russia, and South Africa, along with the established federations in Australia, Canada, and the United States, confront the task of designing the institutions for federal fiscal policy. This paper reviews the literature on the design of tax policy in federalist economies. We conclude that taxation by lower level governments can lead to significant economic inefficiencies and inequities. The usual ‘assignment’ view of federalis recommends central government policies — for example, resident-based taxation or grants-in-aid — to correct these failures. These recommendations assume that the central government will act as a benevolent social planner. The ‘political economy’ view of federalism suggests that this assumption is in error and that additional federalist institutions must be considered. Alternative legislative structures and constitutional rules are considered.     

The influence of taxes on migration: evidence from Switzerland

Empirical studies on the impact of taxation on migration havebeen limited by a lack of comparable data in an internationalcontext and a lack of variation in tax burdens within countries.A notable exception to the latter is Switzerland. Prior empiricalstudies on tax competition in Switzerland have had to rely onaggregated data. In general, these studies have been supportiveof the notion of tax competition, i.e., high earners tend torelocate to low-tax regions. The authors use an alternativepanel approach based on micro-data from the first three wavesof the newly established Swiss Household Panel. Despite activecommunity tax policies aimed at attracting new residents anda significant increase in tax-burden dispersion among communitiesin the past decade, no tax-induced migration is observed. Migrationdecisions are found to be strongly influenced by accommodation-relatedfactors that point to important housing-market effects.     

Price Competition Between Teams

This study uses an experimental approach to examine whether markets are sensitive to the internal incentive structure of the competitors. Toward this goal, we modeled the competitors in a price competition duopoly game as three-player teams. Each player simultaneously declares a bid (price) and the team whose total bid was lower won the competition and was paid accordingly. The losing team was paid nothing, and in case of a tie, each team was paid half its price. This duopoly game was studied under two conditions; a cooperative treatment in which the team's profit was divided equally amongst its members and a non-cooperative one in which each individual member was paid her own bid. Whereas the Nash equilibrium is for each player in either treatment to demand the minimal price possible, we predicted that convergence to the competitive price would be much faster in the cooperative treatment than in the non-cooperative one. The experimental results firmly confirmed this prediction.     

横向税收竞争的环境效应研究

在我国,提供公共产品的事权多在地方。在财力有限的情况下,为了较好地履行职责,地方政府不得不通过参与激烈的税收竞争来增强本地的经济和财政实力。文章通过分析地方税收竞争的诱因,提出地方政府之间存在激烈的横向税收竞争也会影响环境污染的理论推断,并依经济发展水平的不同,将全国分为东、中、西部三个地区,尝试探讨了不同地区环境污染的相似性及差异性。运用面板数据分析地方政府之间横向税收竞争对辖区环境质量的影响情况,结果发现,在横向税收竞争的作用下,不同地区在工业三废排放方面既存在一定的相似性又有所差异。建议采取必要的对应措施解决地方政府之间横向税收竞争所造成的不良环境后果。     

An experimental study of commitment in Stackelberg games with observation costs

We report on experiments examining the value of commitment in Stackelberg games where the follower chooses whether to pay some cost to perfectly observe the leader's action. Várdy [Games Econ. Behav. (2004)] shows that in the unique pure-strategy subgame perfect equilibrium of this game, the value of commitment is lost completely; however, there exists a mixed-strategy subgame perfect equilibrium where the value of commitment is fully preserved. In the data, the value of commitment is largely preserved when the cost of looking is small, while it is lost when the cost is large. Nevertheless, for small observation costs, equilibrium behavior is clearly rejected. Instead, subjects persistently play non-equilibrium strategies in which the probability of the follower choosing to observe the leader's action is a decreasing function of the observation cost.     

中国省级税制结构变动的主导动因——基于面板门限模型的检验

国际经济一体化和国内政策调整主导了税制结构变化.政策制定者若顺应税制结构一般演变规律相应进行调整将会实现社会和谐发展,调整应同时兼顾国际化带来的冲击.从长期来看,经济发展对税制结构的作用程度减弱.若不存在冲击波动,税制结构将趋于稳定;税收来源的多元化和税收收入的指数化有利于降低税制结构波动程度.因此,开征财产税,实现社会保障的费改税,建构多元化且指数化的税收收入体系是我国中长期税制改革的方向.     

The envelope theorem for locally differentiable Nash equilibria of finite horizon differential games

Envelope theorems are established for a ubiquitous class of finite horizon differential games. The theorems cover open-loop and feedback information patterns in which the corresponding Nash equilibria are locally differentiable with respect to the parameters of the game. Their relationship with extant envelope results is discussed and an application of them to a generalized capital accumulation game is provided. An important implication of the theorems is that, in general, the archetypal economic interpretation of the costate vector, namely, as the shadow value of the state vector along the Nash equilibrium, is valid for feedback Nash equilibria, but not for open-loop Nash equilibria.     

分配承诺、产权与经济效率

在政府分配的承诺可置信时,地方政府分权竞争的结果是资方获得了最大利益,而劳方的利益被忽视了。而当政府分配的承诺不可置信时,资方的投资生产激励会受到较大的削弱,社会福利会受到较大损害。关于中国经济增长奇迹的经济解释,文章认为:在改革开放初期,中性政府对经济增长起到了很重要的作用;而随着改革开放的深入,地方政府分权的竞争激励机制可能起到了更为重要的作用。产业结构与产权保护有着密切的关系,要使产业结构完成升级,拥有良好的产权保护制度是一个重要条件。针对地方政府分权竞争带来的问题以及承诺可置信性缺失,文章引入第三方规制和以权力配置作为一种可信承诺等两种解决途径,并指出了其不足之处。     

Economic integration and fiscal devolution

In this paper we investigate how economic integration influences the political decision of integration and separation of jurisdictions. In a model with (imperfect) capital mobility, we consider that, not only the redistributive policy itself, but also the level of policy centralization is decided by a majority vote. We find that the net benefit from integration is not monotonic with the level of world capital market integration and present a case where integration of two regions occurs only for intermediate levels of mobility. This conclusion relies on the comparison of the regional majorities’ utility under the various regimes. The benefits from integration arise from the elimination of tax competition across jurisdictions, which allows for more income redistribution, whereas the costs are linked to the diversity of preferences across regions, namely that of the decisive voters. We also show that a federal regime is better than complete centralization in keeping a nation united.