THE CHOICE OF APPORTIONMENT FACTORS UNDER FORMULA APPORTIONMENT

Authors

  • Marco Runkel,

    1. Technische Universität Berlin, Germany; Norwegian School of Economics and Business Administration, Norway
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  • Guttorm Schjelderup

    1. Technische Universität Berlin, Germany; Norwegian School of Economics and Business Administration, Norway
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    • We would like to thank an anonymous referee, Thiess Büttner, Andreas Haufler, Eckard Janeba, Sebastian Kessing, Jukka Pirttilä, Doina Radulesu, Marco Sahm, and Jay Wilson for helpful comments. Both authors gratefully acknowledge financial support from the Ruhrgas Foundation and the Research Council of Norway. The first author gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft (DFG), Grant No. RU 1466/1-1. The usual disclaimer applies. Please address correspondence to: Marco Runkel, Technische Universität Berlin, School of Economics and Management, Straße des 17. Juni 135, H51, 10623 Berlin, Germany. Phone: ++ 49 30 314 25 466. E-mail: marco.runkel@tu-berlin.de.


  • Manuscript received May 2008; revised November 2009.

Abstract

This paper investigates the choice of apportionment factors under a corporate tax system of Formula Apportionment. In contrast to perceived wisdom, we show that the apportionment formula contains both mobile (capital) and immobile (labor) factors, regardless of whether the formula is determined decentrally by jurisdictions or centrally by a central planner. The central planner uses the formula as a corrective instrument to internalize fiscal externalities. We calibrate the model to the European Union and show that replacing the current system of Separate Accounting by Formula Apportionment would substantially increase tax revenue and welfare under both centralized and decentralized formula choices.

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