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In this Policy Watch study, we explore the different approaches to corporate income tax (CIT) setting in three economically significant regions: USA, EU, and People’s Republic of China (PRC). We characterize tax-setting in the three regions as occurring at three hierarchical levels and examine the impact of this on tax competition. We find that there is considerable heterogeneity across the regions. The approach in the PRC is particularly notable. While the PRC has established centralized rate of CIT at the highest level, it is unique in having a tax-sharing system with its lower tiers of government. This connection between the different levels of government within the PRC plays a crucial role in China’s unique CIT rate-setting agenda that results in intense and tacit inter-jurisdictional tax competition.

The literature on tax competition has argued that tax base equalization, which reduces regional disparities in tax bases, can serve as a means of internalizing horizontal and vertical fiscal externalities. This argument assumes that each government relies on a single tax base (a regional tax on mobile capital and a federal tax on savings). This paper considers the case in which a distortionary labor tax is also available. Internalizing fiscal externalities requires that while the regional capital tax base is fully equalized, a region’s equalization entitlement for the labor tax is positive when its tax base is “larger” than the average tax base of all regions. This efficient tax base equalization system is incompatible with the primary objective of fiscal equalization.

The article examines the institute of principles of tax competition in the administration of budget revenues of the budget system of the Russian Federation. The article considers the issues of the essence of the term “principles of tax competition in the field of budget revenue administration”, its content, and the correlation of the existing principles in the legislation of the Russian Federation: the BC of the Russian Federation, the Tax Code of the Russian Federation, on competition in the Russian Federation. Based on the analysis of the definitions available in science and legislation of the Russian Federation, the author proposes the concept of the term “principles of tax competition in the administration of budget revenues” and their division into two groups: general (general legal) and special (industry). Based on the proposed principles, the factors influencing tax competition in the administration of budget revenues of the budget system of the Russian Federation are identified.

This study aims to extend the study of property tax competition to a highly fragmented local context. Applying the tax competition theory to the property tax, I estimate the causal effect of a property tax increase at one level of government on fiscal decisions of another level of overlapping governments. To address endogeneity concerns in jurisdictional overlap, I employ different quasi-experimental approaches based on school bond referenda, using regression discontinuity (RD) and difference-in-differences (DiD) frameworks. The RD and DiD estimates together suggest that an increase in school taxes would eventually lead to higher tax rates in overlapping cities. The findings confirm the existence of tax competition, which is consistent with the yardstick competition model. Furthermore, given the cross-district heterogeneity in taxing capacity and intergovernmental constraints, the results indicate the presence of power dynamics among localities.

This paper examines the efficiency of destination-and origin-based consumption taxes, in the presence of consumption generated perfect cross-border pollution spillovers, when tax revenue either finances public pollution abatement or it is lump-sum distributed. When consumption tax revenue finances the provision of public pollution abatement and regions have identical and quasi-linear preferences then, the non-cooperative equilibrium origin-based consumption taxes are efficient, while the destination-based consumption taxes are inefficiently low. When, however, consumption tax revenue is lump-sum distributed, then, the destination-based tax principle leads to inefficiently low taxes, while the origin-based tax principle leads either to inefficiently high or low taxes.

espanolLa iniciativa GloBE de tributacion minima, impulsada por la OCDE, va a alterar de manera significativa la distribucion de la potestad tributaria sobre rentas transfronterizas, limitando la competencia fiscal por debajo del gravamen minimo que el Marco Inclusivo acuerde para lograr un aumento de la recaudacion en terminos agregados. Pese a su relevancia, en el transcurso del proyecto no se han abordado de manera adecuada las implicaciones de politica fiscal que conlleva la adopcion de las medidas propuestas, ni los problemas referidos a su adecuada implementacion. Estas cuestiones se abordan en el presente trabajo. EnglishThe OECD’s GloBE minimum tax initiative proposed within the Inclusive Framework will significantly alter the taxing rights on cross-border income worldwide, curtailing tax competition below the minimum tax agreed upon in the Inclusive Framework to achieve an increase in revenue in aggregate terms. Despite its relevance, the tax policy implications of the proposed measures and the problems related to their proper implementation have not been adequately addressed during the course of the project. These issues are deal with in the present contribution.

We augment the traditional model of tax competition with spillovers in public good provision. In our model, identical countries compete for mobile capital. A subset of these countries can coordinate their taxes and provide a public good that generates international spillovers. This subset forms a club of high taxes. Adopting a utility function that is linear for the public good and a quadratic production function, we calculate the equilibrium tax rates and capital allocation. The partial tax equilibrium is analogous to size differences. We show that the utility of both club and non-club countries increases with the number of participating members. We also demonstrate that an increase in the degree of spillovers benefits all, including countries outside the club, even though outsiders do not directly benefit from the spillovers. We show that in a world with many tax competitors, spillovers can restore the stability of cooperation and compensate for incentives to exit the club to win the tax competition.

A growing body of economics literature shows that multinational corporations (MNCs) shift their profits to tax havens. We contribute to this evidence by comparing a range of available data sets focusing on US MNCs, including country-by-country reporting data, a full sample of which has been released in December 2019 for the first time. With each of the data sets, we analyse the effective tax rates that US MNCs face in each country and the amount of profits they report. Using country-by-country reporting data, we have been able to establish that lower effective corporate tax rates are associated with higher levels of reported profits when compared with different indicators of real economic activity. This corresponds to the notion that MNCs often shift profits to countries with low effective tax rates—without also shifting substantive economic activity. Consequently, we identify the most important tax havens for US MNCs as countries with both low effective tax rates and high profits misaligned with economic activity.

In recent years, profit shifting by multinational companies has generated substantial revenue costs to the U.S. government. The Tax Cuts and Jobs Act (TCJA) changed the climate for profit shifting in several important ways: the lower U.S. corporate rate should lower the incentive to shift profits away from the United States, while “territorial” tax treatment (of some income) and the removal of tax upon repatriation should raise the incentive to shift profits abroad. In addition, two novel base protection measures, the GILTI and the BEAT, aim to reduce profit shifting. This paper discusses tax law changes under the TCJA, considering the nature of their effects on profit shifting. The paper also evaluates the effects of the global minimum tax (GILTI) on the location of taxable profits. Once adjustment to the legislation is complete, estimates suggest that the GILTI should reduce the corporate profits of U.S. multinational affiliates in haven countries by about 12 to 16 percent, modestly increasing the tax base in both the United States and in higher-tax foreign countries. Of note, a per-country minimum tax would generate much larger increases in the U.S. tax base; a per-country tax at the same rate reduces haven profits by 23 to 31 percent, resulting in larger gains in US revenue.

In this paper, we reconsider the leadership of tax competition, focusing on a situation where total amount of capital competed by countries is endogenously determined. Specifically, we model a timing game under asymmetric tax competition, in which capital is supplied not only by the residents of two countries, but also by investors outside these countries. The results show that, when the capital market becomes more accessible for outside investors, sequential-move equilibria are more likely to be realized, in which one country leads and the other follows. Conversely, only a simultaneous-move equilibrium emerges when the openness of the market is sufficiently small. These results are reversed when governments compete in public investment rather than tax.

The problem of efficiency of regional tax expenditures is an actual issue of the fiscal policy and fiscal federalism in Russia. A large fiscal autonomy allows federal subjects to realize a more active tax policy to attract new investments. One cannot claim current fiscal powers of the Russian regions to be wide. However, not all the regions use even existing tax policy instruments. Moreover, out of the regions that use them only few provide incentives to stimulate investment decisions. Others use regional tax measures to support businesses that already have strong positions in the region. And it is an open question whether such tax incentives are efficient. On the other hand, an aggressive tax competition for investors can also be wasteful for regional budgets. In this paper, we calculate indicators that characterize the depth and scope of tax exemptions provided at the regional level. The calculations are based on the open tax statistics. Through the analysis of the tax legislation as well as the economic structure of selected regions, we reveal the inducements of their higher activity: federal regional tax policy, tax competition or benefits for budget-forming companies of the region.

In standard models of fiscal federalism, tax competition among subnational jurisdictions depresses government expenditures. Centralization therefore increases government spending, assuming that both local and central governments are price takers in the market for public goods. If the central government has greater market power than constituent jurisdictions, then centralization may be associated with reduced government spending. Whether centralization or decentralization provides more public goods depends on the relative strengths of tax competition and market power. In an illustrative example, decentralized public goods spending can range from 25 to 120% of centralized spending.

Local public services are produced through various overlapping jurisdictions. This study examines how the issuance of municipal general obligation bonds is affected by the tax policies of overlapping local governments. The findings challenge the hypothesis that the shared tax base would be overused in a common‐pool resource scenario. Instead, the empirical results show that the issuance of general obligation bonds is more likely in jurisdictions where counties and school districts make more intensive use of the property tax. These findings highlight the importance of the signals local governments receive from their overlapping neighbors regarding voters’ demand for additional public spending.

This paper explores how fiscal incentives affect capital tax decisions by local governments in the Chinese context. We develop a model in which local governments, facing different fiscal incentives, compete for mobile capital over corporate taxes. The key prediction of the model, borne out in data from Chinese cities over the years 2004–13, is that an increase in the local corporate income tax‐sharing ratio, proxying local fiscal incentives, makes city governments’ horizontal tax reactions stronger. Our results contribute to the fiscal federalism literature by providing evidence in support of the argument that fiscal incentives faced by local governments significantly shape their policy choices. Additionally, we provide explicit evidence on local tax competition within provinces in China, which has long been regarded as one of the driving forces of China's rapid economic growth.

The purpose of this paper is to discuss the broad issue of how to make the financial sector serve society, at least serve it better than it has until now. Finance has been the centre of attention, for better or for worse, for more than a quartercentury, partly because of its increasing share of GDP, and partly because of the negative behaviour and activities of its professionals. The paper is divided into six parts. The first section concerns the necessity of stopping adverse behaviours (activities). Section II presents some measures aimed at encouraging positive activities and promoting positive behaviour. Section III discusses a crucial issue concerning the urgent need to curb rent-seeking. Section IV discusses taxation in the context of the corrosive effect of tax competition. Section V, using analysis provided, presents measures to enhance the role of government in restoring the public’s eroded trust in financial institutions. Finally, Section VI discusses questions about how we can restore trust.

In a two-country economy, we analyze how tax competition differs from the standard all-Nashian tax competition, if one or both countries are Kantians in Roemer’s sense. Kantians are shown to choose a higher tax rate than Nashians for any given tax rate of the other country, which indicates that they seek to mitigate the (Nashian) race to the bottom. In case of symmetric countries, the all-Kantian tax competition turns out to be efficient and the inefficient race to the bottom is weakened in economies with a Nashian and a Kantian. That confirms the intuitive idea that countries following the Kantian categorical imperative avoid or at least soften the socially undesirable impact of (Nashian) self-interest. We also investigate the incentives of opportunistic countries to choose Nashian or Kantian behavior out of self-interest and find that either both governments choose to behave as Kantians or that—under different conditions—the robust Nashian self-interest supersedes Kantian moral principles such that the inefficient all-Nashian tax competition results.

The impact of the intra-government (vertical) tax competition on firms’ location choices is seldom studied in the literature. In this paper, we use the local corporate income tax revenue retention ...

This paper reviews developments since the 1970s in economic thinking about the design of taxes on business profit. It charts developments from proposals for a cash flow tax from the Meade Committee, to refinements of this in the form of an Allowance for Corporate Equity (ACEA) and levying the cash flow tax in the country of destination. It describes how the development of international trade and investment has led to ever-increasing problems in the international tax system with respect to economic efficiency, profit shifting, complexity and tax competition, and identifies why responding to these problems requires a major reform in the location of taxation.

We propose an infinitely repeated game of tax competition with an endogenous capital supply. Our results show that the larger the capital supply elasticity to interest rates, the easier it is for interregional tax coordination within a country to be achieved. The capital supply elasticity is lower when countries are less integrated into the international capital market, and vice versa. Thus, our finding suggests that the regions in the country with a lower (higher) degree of integration in the global market are less (more) likely to achieve tax coordination.

We analyze the unilateral introduction of a destination-based corporate cash-flow tax system (DBT), as proposed by Auerbach and Devereux (AEJ Policy 2018). We show that, first, the DBT rate is decision-neutral only if the source tax country makes the DBT payments deductible from its tax base. Second, a unilateral DBT introduction is, in many aspects, equivalent to completely abolishing the corporate tax and, instead, taxing domestic investors based upon their worldwide profit income, net of foreign taxes and on accrual. In this sense, the DBT is actually a pure residence-based tax. This implies that, from a foreign investor’s perspective, the DBT country is like a zero-rate tax haven and has the same gravitational power on taxable profits and economic activity. Third, the location of profit and activity within its borders is, however, without any fiscal value for the DBT country. Fourth, the introduction of a DBT system reduces national income. Fifth, the DBT country can only individually benefit from its new tax system if public goods provision is substantially increased. Finally, it is optimal to complement a unilateral DBT system with a source-based tax.

We analyse a firm’s investment decision in a regional economy composed of two countries. The firm already manufactures a horizontally differentiated good in the region, and we determine the firm’s equilibrium location choice for the new good and the welfare consequences of fiscal competition between the two countries. We find that the firm’s location decision is efficient. Fiscal competition does not affect the location of production but merely redistributes rents between the firm and the taxpayers of the host country. As far as we know, the tax competition literature has not previously addressed the issue of product differentiation.

We analyze Nash equilibrium in fiscal competition with tax and public investment between symmetric regions. We show that given the opposite strategic nature of tax (strategic complement) and public investment (strategic substitute), there is possibility of multiple equilibria. We find that if strategic substitute effect dominates strategic complement effect, then both regions have first mover advantage in a timing game and simultaneous move Nash equilibrium (early, early) emerges; otherwise sequential move equilibria-(early, late) and (late, early) emerges. Also, sequential move Nash equilibria are Pareto improving than simultaneous move outcome. Lastly, race-to-the-bottom in taxes is restricted in sequential move equilibria.

Multinational firms use internal debt financing to shift profits from high-tax to low-tax countries. Therefore, governments restrict the deductibility of interest expenses by applying thin-capitalization rules (TCRs). TCRs fall into two main categories: safe haven rules (SHR) and earnings stripping rules (ESR). We analyze the optimal TCR choice in a two-country tax competition model. We show that unilateral replacement of SHR by ESR imposes a negative profit shifting externality on the other country. This effect can explain the recently observed switch from SHR to ESR in many countries. However, ESR may be a dominant strategy even when SHR is socially optimal, i.e., the observed policies of ESR implementation may indicate a prisoner’s dilemma.

This paper investigates the relationship among tax competition, the equilibrium efficiency of providing public goods, and intergovernmental transfers, under labor market imperfections. Labor market imperfections cause unemployment-exporting externalities, in addition to fiscal externalities. One of the key points is the unemployment-exporting externality can be either a positive or negative externality. A transfer must internalize these two different externalities to provide public goods efficiently. We consider three specific transfers: tax base equalization, tax revenue equalization, and GDP-based equalization. This paper shows that tax base equalization is more effective than revenue equalization in improving the efficiency of public goods supply if two positive externalities are present. In contrast, tax revenue equalization may be better than tax base equalization if both positive and negative externalities are present. This implies that these two options fail to eliminate the overall external effect in some cases. We demonstrate that in a realistic situation, GDP-based equalization can internalize two different externalities perfectly.

The European Union is a unique economic and political union, a single "internal" market with over than 510 million inhabitants. Further coordination in the field of taxation is required, since it is not yet integrated into the E.U. policy and remains under the responsibility of national governments. However, the economic and financial turmoil caused by the crisis of 2008 and the new challenges resulted from the globalization and digitalization of the economy, require profound reforms to tax systems. Thus, fiscal policy is a significant priority on the EU agenda: firstly, in order to stabilize public finances, stimulate growth and competitiveness and finance the European social welfare model as well as to tackle tax evasion and aggressive tax planning, developed mainly by multinationals. The present paper attempts to explore on a theoretical and empirical basis the challenges and possible developments towards harmonization in European taxation, at a critical juncture, not only for the integration but also for the existence of the European Union. More specifically, it investigates the Greek taxation and its structural weaknesses through empirical research conducted with questionnaires distributed among 225 tax officers, accountants, and accounting executives and statistical processing of their response. The results were examined through descriptive analysis, segmented in seven theoretical domains based on the examination of both audit literature and the present taxation state of Greece. The findings reveal that structural problems remain unresolved within the Greek tax system. However, it is understood that issues of distrust toward the taxation system may hinder harmonization processes.

Leadership (sequential choice) and political delegation are two mechanisms suggested to restrict “race-to-the-bottom” in tax competition. In this article, we analyze whether these two mechanisms wh...

Policymakers seeking to raise more tax revenues from multinational enterprises have two alternatives: to raise tax rates or to devote more resources to improve tax compliance. Tougher tax enforcement increases the cost of profit shifting, and thus mitigates tax competition. We present a tax‐competition model with two policy instruments (the corporate tax rate and the tightness of tax enforcement). In line with the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting project, we analyze the scope for enforcement cooperation among asymmetric countries, considering that taxes are set noncooperatively. We show that the low‐tax country may fail to cooperate if asymmetry is large enough and that tax havens would never agree to cooperate. Then we identify two drivers for enforcement cooperation. The first driver of cooperation is the complementarity of enforcement actions across countries. This is because the efficiency loss from enforcement dispersion is greater under complementarity. The second driver of cooperation is tax leadership by the high‐tax country, which acts as a level‐playing field in the tax competition and reduces the extent of disagreement on enforcement.

In this article, we show that spillovers may provide an alternative explanation for the heterogeneity of tax reaction functions under tax competition. In particular, we assume the existence of$$n\ge 2$$n≥2jurisdictions, which compete to attract mobile capital in a context where public expenditure produces spillovers. We show that the latter can lead to asymmetric responses. For instance, jurisdictionimay react positively to a change in the tax rate of jurisdictionjand negatively to the change in jurisdictionz. From a policy point of view, these findings are helpful to understand the mixed results found by the empirical literature, and to analyse the tax reaction functions of city centres and suburban jurisdictions.

Küreselleşmeyle birlikte mal, sermaye, haber ve bilgi akımları mekan sınırlarını aşmıştır. Özellikle son yıllarda yaşanan teknolojik gelişmelere paralel olarak, sermaye bu sınırsız hareketlilik içinde kendisi için en cazip bölgelere yerleşmiştir. Ülkelerin, sermayeyi vergi avantajları sağlayarak ülkelerine çekme isteği neticesinde, vergi cennetleri kavramı ortaya çıkmıştır. Bu çalışmada, vergi cennetleri konusu mekansal dönüşüm süreci içinde ele alınarak, tarihsel bağlantının kurulması amaçlanmıştır. Antik Çağ'dan günümüze kadar mekanın özellikle üretim biçimlerin üzerindeki etkisi, sermaye- mekan ilişkisi açısından oldukça önemlidir. Sermayenin mekandan bağımsızlaşarak uluslararası hareket kabiliyeti kazanması, ülkelerin uyguladıkları vergi polititkalarını biçimlendirmiştir. Bunun yanında, bilgi çağında dijitalleşen mekan vergilendirme konusunda yaşanan zorlukları arttırmış ve vergi tabanının aşınmasına neden olmuştur. Diğer yandan dijitalleşme bilginin yayılma hızını arttırarak, Panama Belgeleri ve Paradise (Cennet) belgeleri sızıntılarıyla vergi uygulamalarında şeffaflık sağlanması konusunda yardımcı bir rol üstlenmiştir. Bu sızıntılar, uluslararası kuruluşlarca sunulan önerilerin güncellenmesinin ve önlemlerin arttırılmasının gerekliliği ile bilgi değişim anlaşmalarının önemini bir kez daha göstermiştir. Goods, capital, news and information flows have crossed the boundaries with globalization. In line with the technological developments, capital has settled in the most attractive regions for this unlimited mobility in recent years. Countries seeking to attract capital by providing tax advantages to the capital. As a result of this, tax havens which suggests a shift of tax burden emerged. These jurisdictions also share limited or no financial information with foreign tax authorities. In this thesis, it is aimed to establish a historical connection by addressing the subject of tax havens in the process of spatial transformation. The concept of space has been a very important factor in terms of capital-space relationship with its effect on production forms from ancient times to the digital age. Capital has become independent from the space and has exceeded the physical limits of the space. Thus, capital gaining international mobility has shaped the tax policies of countries. Especially, digitalization of space has increased the difficulties in taxation. This situation caused the tax base to erode and tax revenues to decrease. On the other hand, digitization has allowed information to be spread easily. Thus, it has become easier to access digitally recorded information about tax evasion that causes tax revenue to drop. In this regard, Panama Papers and Paradise Papers played useful roles in ensuring leaks and transparency in tax systems. After the information that emerged in these leaks, the suggestions offered by international organizations were diversified and their measures were increased. At the same time, these leaks show that the information exchange agreements required to ensure transparency have demonstrated their importance. 172

Taxing multi-national corporations poses a challenge for national governments since multi-national corporations are often able to shift their incomes to low-tax jurisdiction using a variety of accounting techniques. Tax competition between national governments relies on companies making use of such techniques. This policy brief provides an overview of the topic of corporate tax avoidance. It consists of three parts. First, it provides a non-technical overview of the most common methods that multi-national corporations use to legally minimize their tax liabilities. Second, it discusses the main regulatory initiatives at the global and European levels that aim to tackle the challenge of eroding revenues from corporate income tax due to companies shifting profits to low-tax jurisdictions. These efforts to stop corporate tax avoidance have gained considerable momentum since 2013 but are likely to turn out as insufficient to stop corporate tax avoidance. The regulatory initiatives adopted or currently discussed at the international level pursue a piecemeal approach of closing loopholes in the existing system of international corporate taxation. However, low-tax jurisdictions may respond to these closing of loopholes by a further lowering of statutory tax rates or an expansion of preferential tax arrangements, thus potentially neutralizing regulatory efforts by inducing a shift from profit shifting to investment shifting. This policy brief presents a proposal for a more radical overhaul of global corporate taxation consisting of a combination of a global unitary tax and a limited range of statutory tax rates, whereby the rates permissible will be adjusted to a jurisdiction’s level of economic development, allowing less developed countries to use tax incentives to attract investments within defined limits. Public country-by-country reporting and a global register of beneficial owners are proposed to augment a global unitary tax.

Paper contains an empirical cross-country comparative analysis of international tax policy in relation to MNEs and their FDIs in the context of international tax planning motives. First, I explore and compare the rules aimed at protecting the tax base and countering tax avoidance and the rules aimed at attracting investments. Second, I evaluate the impact of these corporate tax rules on the FDIs. My findings show that the countries with different fundamental economic characteristics use different tax policy to compete for FDIs by the MNEs. I highlight three groups of countries with differing tax competition behaviours: (a) emerging economies, (b) large-scale, developed economies and (c) financial centres. Financial centres with anomaly higher level of FDIs passing through them adopt the most open tax policy which drives the global tax competition for financial capital, while both larger developed and emerging economies adopt more defensive corporate tax policy that is motivated by the fiscal considerations.

In this study, we extend the standard approach of horizontal tax competition by endogenizing the policy objectives that governments pursue. Following the literature on strategic delegation games, we consider a pre-play stage, where jurisdictions commit themselves to act as Leviathan or as benevolent agents. We show that the symmetric sub-game perfect equilibria correspond to three cases of tax competition among the Leviathan governments, moderate Leviathans, and benevolent governments, depending on the form of capital ownership. Further analysis reveals that asymmetric tax competition generates competition between the benevolent government and the (moderate) Leviathan government. The results provide grounds for benevolent or Leviathan objectives and explain why some governments act as one, while others aim toward a different objective.

We find that corporate income tax (CIT) rates are significantly positively associated with corporate debt and negatively associated with household debt, using panel data of 28 OECD countries between 1995 and 2015. The found association between CIT and debt comes from small countries where CIT is more exogenous due to tax competition. The tax deductibility of interest payments encourages firms to use more debt when CIT is high. If the total supply of loanable funds is not affected by a lower CIT, a lower CIT leads to a larger fraction of the total private debt incurred by the household sector. The estimated association becomes stronger in regressions with difference-stationary variables. A decrease in the CIT rate can explain around one-fourth of the increase in the average household debt incurred during the last two decades. The paper is the first study to investigate and yield supportive, though weak, evidence of distortion in household indebtedness caused by a CIT cut.

This paper contributes to the literature on fiscal equalization and corporate tax competition. The innovation is that we explicitly model multinational enterprises and a corporate tax system that is designed according to formula apportionment. Two main results are obtained. First, in contrast to previous studies we identify cases where tax revenue equalization is better in mitigating detrimental tax competition than tax base equalization. Second, tax base equalization nevertheless has the advantage that it may render tax rates efficient, depending on the shape of the apportionment formula. A pure payroll formula does not ensure efficiency, but a back‐of‐the‐envelope calibration of our model to Canadian provinces suggests that a pure sales formula may be optimal.

This paper shows that a small country can have an incentive to tax inbound FDI even in a setting with perfect competition and free entry that is compatible with the Diamond–Mirrlees (Am Econ Rev 61(1):8–27, 1971) framework. While firms make no aggregate profits worldwide due to free entry in this setting, they make taxable profits in foreign production locations because their costs are partly incurred in their home countries. These profits are not perfectly mobile because firm productivity varies across locations. Consequently, the host country does not bear the entire burden of a tax on foreign firms, giving rise to an incentive to tax foreign investors. The standard zero optimal tax result can be recovered in this model under an apportionment system that ensures zero economic profits in each location.

Fiscal externalities across jurisdictions can arise from tax evasion and avoidance. While the tax competition literature has generally focused on base shifting and the resulting positive fiscal externalities, we show theoretically and empirically that negative fiscal externalities can dominate when the tax base is apportioned across jurisdictions. This can lead to a negative relationship between jurisdiction size and the desired tax rate. Interstate truckers in the United States owe state diesel taxes based on diesel consumption, which is apportioned based on the miles driven in each state. We find that own-state diesel sales fall when the diesel tax rates of other states rise, suggesting that tax base evasion is the predominant source of externalities. We then estimate a tax reaction specification, finding that the own-state tax rate is negatively correlated with the tax rates set in other states and with state size, both consistent with the sign of the estimated fiscal externality.

This study examines the choice of governments' policy objectives in tax competition with an endogenous capital supply. Our results confirm the following scenarios. (i) The welfare-maximizing region completely deviates from its primary goal and maximizes tax revenue when the capital supply elasticity, with respect to the interest rate, is low. (ii) The welfare-maximizing region pursues its primary goal and moderately maximizes welfare when the capital supply elasticity is high. In case (ii), the extent of welfare maximization orientation increases with the capital supply elasticity.

The subject of the scientific work is analysis of the essence of the “transfer pricing” concept. It has been proven that transfer pricing is an economic and legal tool used by business entities for their tax burden optimization. It has been concluded that the concept “transfer price” means the price generated by multinational corporations in the process of commercial activity between the affiliated companies located in different countries and, correspondingly, different tax jurisdictions. In essence, transfer pricing means intra-company pricing of goods transferred between the enterprise subdivisions located in different countries. Base erosion by means of transfer pricing can be performed not only based on the price manipulating by the affiliated companies, but also as a result of manipulating incomes and expenditures. The latter is accompanied by the financial resource withdrawal outside the national economy and its concentration in the low taxation jurisdictions. Transfer pricing bears serious risks both for an individual country and for the world economy. Contractual freedom of transnational corporations and industrial and financial groups cannot be unlimited regardless of the principle of freedom of contracts in the private law relations. Economic activity of such business entities must subject to a strict control on the part of the country. In the process of transfer pricing tax control, the controlling state agencies are intended to prevent the decrease of tax liabilities by shifting the income to low tax jurisdictions by taxpayers.

This study provides an empirical investigation of fiscal interactions in the context of a developing country. I examine three fiscal components—budget balance, tax revenue, and public spending—to measure spatial interactions between Colombian municipalities from 2000 to 2010. I am using variables on municipalities’ general characteristics, fiscal variables, and variables related to the conflict. I use a quasi-experimental identification strategy exploiting exogenous variation from global oil price shocks that affect Colombian municipalities to different degrees depending on local oil endowments. I find significant spatial interaction in taxes but no significant interaction concerning budget balance and total public spending. This suggests that even though there is local tax competition, municipalities do not mimic their neighbors to decide whether to offset tax changes by changes in borrowing or spending.