Sub-metropolitan tax competition with household and capital mobility
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This paper investigates the efficiency properties of tax competition between sub-metropolitan jurisdictions when capital, residents and workers are mobile, and both households and firms compete for local land markets. We analyze two decentralized equilibria: (1) With a local tax on residents and two separate local taxes on capital and land inputs, efficiency is achieved and the existence of a marginal fiscal cost due to residents’ mobility is revealed; (2) Combination of the taxes on capital and land inputs into a single business property tax leads local authorities to charge inefficiently high taxation on capital. We show that capital mobility induces a reduction in the business land taxation and local public inputs are used to offset the distorting effects of the property tax, accounting for the distorting impact of workers’ mobility.
KeywordsTax competition Public goods Public inputs Household mobility Capital mobility
JEL ClassificationH71 H72 R50 R51
I thank the editor and an anonymous referee for helpful comments and suggestions. I am grateful to Sonia Paty, Florence Goffette-Nagot, Thierry Madiès, Stéphane Riou, Hubert Jayet, Etienne Farvaque, Albert Sollé-Ollé, Fransisco José Veiga, Stéphane Gauthier, Michael Suher for valuable comments. I also thank participants in the Annual Meeting of the North American Regional Science Council (Minneapolis), Public Economics at the Regional Level Workshop (Santiago de Compostela), Political Economy and Local Public Finance Workshop (Lille), GATE (Lyon), Journées de Microéconomie Appliquée (Besançon) and French Economic Association Meeting (Nancy) for their comments. Financial support from Région Auvergne-Rhne-Alpes (ARC 7 and Explora’Doc) is gratefully acknowledged.
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