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Tax Competition and Efficient Fiscal Transfers under Capital and Labor Income Taxes

Author

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  • Mutsumi Matsumoto

    (Graduate School of Environmental Policies, Nagoya University)

  • Hikaru Ogawa

    (Faculty of Economics, The University of Tokyo)

Abstract

This paper considers efficient fiscal transfer policies in a tax competition setting with ad valorem taxation (i.e., income taxation) on mobile capital and immobile labor. We show that fiscal equalization of regions’ capital income tax bases eliminates the inefficiency of horizontal tax competition if these tax bases are evaluated by the average taxable return on capital in all regions, rather than the taxable return in each region. This equalization system, together with revenue matching grants that correct vertical externalities, achieves efficiency. By investigating the nature of horizontal and vertical externalities arising from non-cooperative regional tax policies, we derive formulas for efficient fiscal transfer policies and explain their workings.

Suggested Citation

  • Mutsumi Matsumoto & Hikaru Ogawa, 2022. "Tax Competition and Efficient Fiscal Transfers under Capital and Labor Income Taxes," CIRJE F-Series CIRJE-F-1196, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2022cf1196
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    Cited by:

    1. Mutsumi Matsumoto & Hikaru Ogawa, 2023. "Corporate income tax competition and efficient tax base equalization," Economics of Governance, Springer, vol. 24(1), pages 109-118, March.

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