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Apportionment, Fiscal Equalization and Decentralized Tax Enforcement

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  • Christian Traxler

    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Andreas Reutter

    (University of Konstanz)

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.

Suggested Citation

  • Christian Traxler & Andreas Reutter, 2008. "Apportionment, Fiscal Equalization and Decentralized Tax Enforcement," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2008_21, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2008_21
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    References listed on IDEAS

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    Cited by:

    1. Bönke, Timm & Jochimsen, Beate & Schröder, Carsten, 2014. "Fiscal federalism and tax enforcement," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100394, Verein für Socialpolitik / German Economic Association.
    2. Libman Alexander & Feld Lars P., 2013. "Strategic Tax Collection and Fiscal Decentralization: The Case of Russia," German Economic Review, De Gruyter, vol. 14(4), pages 449-482, December.
    3. Bönke Timm & Schröder Carsten & Jochimsen Beate, 2017. "Fiscal Equalization and Tax Enforcement," German Economic Review, De Gruyter, vol. 18(3), pages 377-409, August.
    4. Caterina Liesegang & Marco Runkel, 2009. "Corporate Income Taxation of Multinationals and Fiscal Equalization," CESifo Working Paper Series 2747, CESifo.
    5. Timm Bönke & Beate Jochimsen & Carsten Schröder, 2013. "Fiscal Federalism and Tax Administration: Evidence from Germany," Discussion Papers of DIW Berlin 1307, DIW Berlin, German Institute for Economic Research.

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    More about this item

    Keywords

    Tax Enforcement; Tax Evasion; Formula Apportionment; Fiscal Equalization; Tax Revenue Sharing;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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