Globalization, Tax Competition and Fiscal Equalization

Gaigné, Carl and Riou, Stéphane (2004) Globalization, Tax Competition and Fiscal Equalization. Discussion paper. University of Strathclyde, Glasgow.

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    Recent empirical evidences suggest that the economic globalization has likely favored the emergence of harmful tax competition among major industrialized countries. This paper analyzes the ability of Öscal equalization to weaken the international tax competition when the economies are not perfectly integrated and the private sector is imperfectly competitive. We consider two types of transfer programs: tax base and tax revenue equalization. The framework developed yields results which agree with empirical evidences and exhibits two types of inefficiencies due to noncooperative behavior: the tax rates are too low in both regions and the difference in tax rates can be too high. Both externalities imply that the provision of public good is too low from an efficiency viewpoint. We show that Öscal equalization may imply more efficient tax policies and tax base allocation between regions, promoting a rise in corporate tax revenues.