Asymmetric tax competition and fiscal equalization in a repeated game setting

Article history: Received 29 July 2014 Received in revised form 3 October 2015 Accepted 5 October 2015 Available online 22 October 2015 This paper examines the relationship between tax competition and fiscal equalization in a standard tax competition model with repeated actions, in which regions differ in per capita capital endowments and production technologies. In particular, it asks how a fiscal equalization scheme affects the tax cooperation condition. It shows that when the scale of fiscal equalization scheme increases, capital exporter is more (and capital importer is less) cooperative in implementing tax coordination. The paper also demonstrates that the best cooperative tax rate – the one that provides the strongest potential for voluntary cooperation – takes a positive value and increases with the scale of fiscal equalization. © 2015 Elsevier Inc. All rights reserved. JEL classification: H21 H77