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Tax Competition with Formula Apportionment: The Interaction between Tax Base and Sharing Mechanism

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  • Martin Kolmar
  • Andreas Wagener

Abstract

The EU Commission is advocating a common consolidated tax base for the corporate income tax, accompanied by a revenue sharing mechanism based on formula apportionment. We analyse tax competition in such a regime, focussing on the interaction between the definition of the tax base and the apportionment method. Tax competition leads to suboptimally low tax rates if and only if the investment elasticity of the tax base is lower than the investment elasticity of the apportionment factor. For any apportionment method a change in the definition of the tax base can turn a race-to-the-bottom in tax competition into a race-over-the-top.

Suggested Citation

  • Martin Kolmar & Andreas Wagener, 2007. "Tax Competition with Formula Apportionment: The Interaction between Tax Base and Sharing Mechanism," CESifo Working Paper Series 2097, CESifo.
    • Handle: RePEc:ces:ceswps:_2097
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    References listed on IDEAS

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    1. Rüdiger Pethig & Andreas Wagener, 2007. "Profit tax competition and formula apportionment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(6), pages 631-655, December.
    2. Anand, Bharat N. & Sansing, Richard, 2000. "The Weighting Game: Formula Apportionment as an Instrument of Public Policy," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 183-200, June.
    3. Walter Hellerstein & Charles E. McLure, Jr., 2004. "The European Commission's Report on Company Income Taxation: What the EU Can Learn from the Experience of the US States," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(2), pages 199-220, March.
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    5. Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2010. "Company taxation and tax spillovers: Separate accounting versus formula apportionment," European Economic Review, Elsevier, vol. 54(1), pages 121-132, January.
    6. Joann Martens-Weiner, 2006. "Company Tax Reform in the European Union," Springer Books, Springer, number 978-0-387-29487-2, December.
    7. Peter Sørensen, 2004. "Company Tax Reform in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 91-115, January.
    8. Jack Mintz, 2004. "Corporate Tax Harmonization in Europe: It's All About Compliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(2), pages 221-234, March.
    9. Dietmar Wellisch, 2004. "Taxation under Formula Apportionment - Tax Competition, Tax Incidence, and the Choice of Apportionment Factors," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(1), pages 24-41, April.
    10. European Commission, 2001. "Company Taxation in the Internal Market," Taxation Studies 0005, Directorate General Taxation and Customs Union, European Commission.
    11. Anand, Bharat N. & Sansing, Richard, 2000. "The Weighting Game: Formula Apportionment as an Instrument of Public Policy," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(2), pages 183-200, June.
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    Cited by:

    1. Gomes, Pedro & Pouget, Francois, 2008. "Corporate tax competition and the decline of public investment," Working Paper Series 928, European Central Bank.
    2. Matthias Wrede, 2013. "Multinational Financial Structure and Tax Competition," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(III), pages 381-404, September.
    3. Matthias Wrede, 2014. "Asymmetric tax competition with formula apportionment," Letters in Spatial and Resource Sciences, Springer, vol. 7(1), pages 47-60, March.
    4. Matthias Wrede, 2009. "Multinational Capital Structure and Tax Competition," MAGKS Papers on Economics 200934, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    5. repec:prg:jnlpep:v:preprint:id:660:p:1-22 is not listed on IDEAS
    6. Kateřina Krchnivá & Danuše Nerudová, 2018. "The CCCTB Allocation Formula Game: The Performance of Economics Sectors," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(4), pages 427-448.

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