Presented paper investigates the choice of apportionment factors under a corporate tax system of Formula Apportionment. In a fully decentralized system jurisdictions choose apportionment weights non-cooperatively and in equilibrium the apportionment formula contains both mobile (capital) and immobile (labor) factors. As a result, tax rates and the quantities of local public goods are inefficient. A welfare gain can be realized by delegating the decision over apportionment factors to a central planner (centralization), while at the same time allowing jurisdictions fiscal autonomy in setting tax rates. In contrast to perceived wisdom, we show that a central planner also uses mobile factors as apportionment weights. The reason is fiscal externalities arising under FA that have previously not been identified in the tax competition literature.


Martin Runkel

LMU München


15.03.2007 | 16:00-17:30


ZEW, L 7,1 D-68161 Mannheim