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Public Provision and Local Income Tax Competition

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  • Florian Kuhlmey
  • Beat Hintermann

Abstract

We extend the literature on local income tax competition by allowing for inter-jurisdictional spillovers and imperfect rivalry in consumption of a publicly provided good. Comparing decentralized second-best results of a theoretical model with an efficient benchmark, we identify three inefficiencies: (1) imperfect redistribution; (2) inter-community free-riding; and (3) an inefficient allocation of the population. We quantify the relative size of these inefficiencies in a numerical implementation of the theoretical model, which reveals that free-riding rises unambiguously in the level of spillovers, whereas the welfare losses from (1) and (3) depend nonlinearly on the levels of spillovers and rivalry.

Suggested Citation

  • Florian Kuhlmey & Beat Hintermann, 2016. "Public Provision and Local Income Tax Competition," CESifo Working Paper Series 5789, CESifo.
    • Handle: RePEc:ces:ceswps:_5789
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    References listed on IDEAS

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    More about this item

    Keywords

    publicly provided goods; tax competition; fiscal federalism; decentralization; free-riding; welfare analysis;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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