Asymmetric tax competition and fiscal equalization in a repeated game setting

•This paper studies how a fiscal equalization scheme affects the tax cooperation among asymmetric countries.•When the scale of fiscal equalization increases, capital exporter is more cooperative in implementing tax coordination.•When the scale of fiscal equalization increases, capital importer is less cooperative in implementing tax coordination.•The best cooperative tax rate takes a positive value and increases with the scale of fiscal equalization.

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.