We develop a model with two countries, producing two goods: one mobile and the other not. The mobile good is taxed according to origin. People decide to buy the good where the price is more advan-tageous.
The two countries engage in tax competition. The introduc-tion of an equalization transfer decreases the fiscal externality due to tax-base mobility: some of the lost tax "comes back". We test the theoretical results on tax data from Canada. We find that tax competition differs according to whether a province is, or is not, receiving the transfer.