In this paper, we analyze the effect of corporate inhabitant tax on local public finance under the hometown tax payment system.
The model in this paper is built on the following assumptions. There are two regions with different population sizes, and each local government aims to maximize tax revenue. Residents of each region have an attachment to the area in which they live, and after comparing that attachment with the tax rate of each region, determine which region to pay their hometown tax.
As shown by Kato and Yanagihara (2022), we consider the model in this framework. In special, in this paper, we introduce a corporate inhabitant tax into the framework of Kato and Yanagihara (2022) to investigate the effects of this tax revenue on tax competition.
The main results of this paper are as follows. First, if the attachment of residents to local region in which they live is equal to the attachment of residents to urban region in which they live, an equilibrium uniquely exists and hometown tax payments are made from the region with a large population to the region with a small population. Second, the tax rates of local and urban governments decrease with an increase in the urban population. Third, when the attachment of residents to local or urban regions in which they live become stronger, the tax rates of local and urban governments increase.
JEL Classifications:H31, H71, H77, N45
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