Tax competition and tax base equalization in the presence of multiple tax instruments

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