Taxation under Formula Apportionment—Tax Competition, Tax Incidence, and the Choice of Apportionment Factors

This paper analyzes tax competition for mobile capital among jurisdictions where capital is employed by the subsidiaries of a unitary firm. Equity capital of the unitary firm is taxed under a formula apportionment scheme, and each jurisdiction has the leeway to choose its desired mix of apportionment factors. The analysis reveals that jurisdictions decide for the use of immobile resources like immobile labor (payroll) as the only apportionment factor. The unitary firm shifts the tax burden to the owners of immobile resources. There is in fact no tax competition among jurisdictions, and the supply of local public goods is not distorted.