Abstract
We examine how regulatory fragmentation across multiple tax jurisdictions creates spillover effects on corporate tax burdens. Using variation in tax policy adoption across states and countries, we study how firms operating in multiple jurisdictions face cumulative compliance costs and coordinated taxation that often results in higher overall tax burdens than would occur under harmonized systems.
Our findings reveal significant spillover effects: firms operating in more regulatory fragmented environments face substantially higher effective tax rates and compliance costs. These effects are particularly pronounced for smaller firms with less sophisticated tax planning capacity. Additionally, we document that jurisdictions often fail to coordinate tax policies, leading to double-taxation and compliance burden spillovers that systematically disadvantage multi-jurisdictional operations.
Key Findings
Fragmentation Penalty
Firms operating across more fragmented regulatory environments face higher cumulative tax burdens and compliance costs than firms in more harmonized systems.
Double Taxation
Lack of coordination across jurisdictions creates double-taxation scenarios where the same income is taxed multiple times, disproportionately affecting multi-jurisdictional operations.
Heterogeneous Effects
Smaller firms and less sophisticated operations experience larger spillover effects from fragmentation, as they have fewer resources to manage complex multi-jurisdictional tax planning.
Policy Coordination Failures
Jurisdictions lack coordination mechanisms to internalize spillover effects, leading to regulatory outcomes that increase aggregate tax burdens for multi-jurisdictional firms.
Research Contribution
This paper contributes to understanding how regulatory fragmentation affects firm behavior and economic outcomes. Rather than studying individual tax policies in isolation, we examine how inconsistencies across multiple jurisdictions create compound effects that burden firms and distort economic decisions.
Our findings have implications for policy coordination discussions, for understanding how regulatory fragmentation affects business competitiveness, and for explaining geographic variation in firm location decisions and business expansion patterns. The results suggest that regulatory harmonization may yield significant benefits for multi-jurisdictional operations and economic efficiency.