Corporate profit tax, capital mobility, and formula apportionment

The paper develops an analytical framework in which regional governments strategically determine the structure of the corporate profit tax system when an apportionment formula determines the proportion of the firms' income subject to regional taxation. The conclusions can be summarized as follows: (i) Regional governments subsidize capital through the corporate tax system. (ii) Tax rates become higher and the portion of capital costs that can be deducted from taxable income becomes smaller as the formula weighs more production shares. (iii) The regionally provided good may be below or above the efficient level. (iv) The extent of the distortion depends on the particular formula put into practice. (v) Regional governments strictly prefer a formula that exclusively weighs the production proportion to any other alternative.