00-061
THE WEIGHTING GAME: FORMULA APPORTIONMENT AS AN INSTRUMENT OF PUBLIC POLICY
Bharat N. Anand and Richard Sansing
We propose and explanation for why states choose difference
apportionment formulas for corporate income tax purposes. Based on a two-state
equilibrium model of location choice by firms, we show that aggregate social
welfare is maximized when both states use the same formula, regardless of which
formula is chosen. However, at least one of the states can increase its
welfare by deviating from this coordinated solution; thus, the Nash equilibrium
features the states choosing different formulas. Importing states have
incentives to increase the sales factor, whereas exporting states will tend to
increase the input factors. An empirical test of which states have deviated
from the traditionally equally-weighted three factor formula supports the
predictions of the model.
Key Words: Multijurisdictional taxation, formula apportionment,
non-cooperative equilibrium.
JEL Classification: H73, R30.
C&S
24 pages
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