Evolutionary Tax Competition with Formulary Apportionment

Evolutionary stability is a necessary condition for imitative dynamics of policy learning
and innovation to come to a rest. We apply this concept to profit tax competition
in a regime where a common and consolidated profit tax base for multi-jurisdictional
firms is divided among governments by means of formulary apportionment. In evolutionary
play, governments exhibit aggregate-taking behavior: when comparing
their performance with others, they ignore their impact on the consolidated tax
base. Consequently, evolutionarily stable tax rates are less efficient than tax rates
in best-response tax competition.