Fiscal Autonomy under Formula Apportionment

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.