Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26958
Authors: 
Traxler, Christian
Reutter, Andreas
Year of Publication: 
2008
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods 2008,21
Abstract: 
We study tax evasion and decentralized tax enforcement in a federal economy with mobile capital and the endogenous formation of multiregional companies. Regions use their enforcement policy as a strategic instrument to engage in fiscal competition. Within this framework, we analyze the uncoordinated policy choice under formula apportionment (FA) and compare it to the incentives which derive from fiscal equalization (FE). As both systems redistribute collected revenues but not enforcement costs, they distort the regions' incentives to enforce taxes. At the same time, jurisdictions partially internalize the fiscal externalities caused by their enforcement policy. We show that the tradeoff between these two opposing effects differs between FA and FE, and crucially depends on the degree of interregional firm integration under FA. We discuss conditions under which FA, FE or a joint system of FA cum FE provides the 'best' incentives for decentralized tax enforcement.
Subjects: 
Tax Enforcement
Tax Evasion
Formula Apportionment
Fiscal Equalization
Tax Revenue Sharing
JEL: 
H77
H71
H26
Document Type: 
Working Paper

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