Working Paper: CEPR ID: DP6431
Authors: Jean JG Hindriks; Susana Peralta; Shlomo Weber
Abstract: The paper considers a model of federation with two heterogeneous regions that try to attract the capital by competing in capital income taxes and public investment that enhance the productivity of capital. Regions' choices determine allocation of capital across the regions and their revenues under a tax sharing scheme. This framework allows for the examination of different approaches to fiscal equalization schemes (Boadway and Flatters, 1982, and Weingast, 2006). We show that tax competition distorts (downwards) public investments and that the equalization grants discourage public investments with a little effect on equilibrium taxes. However, the equalization schemes remain beneficial not only for the federation and, under a low degree of regional asymmetry, also for each region.
Keywords: Equalization; Fiscal Federalism; Heterogeneous Regions; Public Investments
JEL Codes: C72; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax competition (H26) | public investments (H54) |
| equalization grants (H77) | public investments (H54) |
| equalization grants (H77) | equilibrium taxes (H29) |
| fiscal equalization (H77) | public investments (H54) |
| fiscal equalization (H77) | tax competition (H26) |
| public investments (H54) | equilibrium taxes (H29) |