Working Paper: NBER ID: w1369
Authors: Roger H. Gordon; John D. Wilson
Abstract: This paper examines how corporate taxation of multijurisdictional firms using formula apportionment affects the incentives faced by individual firms and individual states. We find that formula apportionment creates factor price distortions which vary in general among firms within a state, and in such a way as often to put multistate firms at a competitive advantage. Formula apportionment also creates incentives for cross-hauling of output,with production in low tax rate states more profitably sold in hightax rate states, and conversely. Politically, formula apportionment appears to be very unstable --states face an incentive to shift to some other form of taxation. None of these problems exist when a corporate tax uses separate accounting.
Keywords: Corporate taxation; Formula apportionment; Multistate firms; Tax policy
JEL Codes: H25; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Formula apportionment (C59) | factor price distortions (P22) |
| factor price distortions (P22) | competitive advantage (L21) |
| tax rates (H29) | investment decisions (G11) |
| Formula apportionment (C59) | crosshauling incentives (D16) |
| crosshauling incentives (D16) | production in low tax states (H71) |
| production in low tax states (H71) | selling in high tax states (H71) |
| Formula apportionment (C59) | instability in taxation (H29) |
| instability in taxation (H29) | shift to alternative taxation methods (H29) |