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Tax Competition, Public Good Provision, and Income Redistribution: The Case of Linear Capital Income Tax

  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

  • C.C. Yang

    (Institute of Economics, Academia Sinica and Department of Public Finance, National Chengchi University)

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    This paper considers a tax competition model in which regional government activities include income redistribution as well as public good provision. To incorporate the regional government function of income redistribution, we extend the tax system from the stylized proportional capital income tax to the linear capital income tax: the revenue collected from capital taxation in each region is used not only to provide the regional public good but also to offer a uniform lump-sum grant to each individual in the region. In contrast to Hoyt's (1991) finding that the extent to which public goods are undersupplied is monotonically increasing in the number of competing regions, we show that, regardless of the number of competing regions, all heterogeneous individuals concur with each other on the first-best provision of public goods; on the other hand, the size of income redistribution is monotonically decreasing in the number of competing regions.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf595.pdf
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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-595.

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    Length: 19pages
    Date of creation: Oct 2008
    Date of revision:
    Handle: RePEc:tky:fseres:2008cf595
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    1. Haufler, Andreas, . "Taxation in a Global Economy," Monographs in Economics, University of Munich, Department of Economics, number 20387, December.
    2. Tanzi,Vito & Schuknecht,Ludger, 2000. "Public Spending in the 20th Century," Cambridge Books, Cambridge University Press, number 9780521662918.
    3. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
    4. Zax, Jeffrey S, 1989. "Is There a Leviathan in Your Neighborhood?," American Economic Review, American Economic Association, vol. 79(3), pages 560-67, June.
    5. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, vol. 1(1), pages 1-62, December.
    6. Wellisch,Dietmar, 2000. "Theory of Public Finance in a Federal State," Cambridge Books, Cambridge University Press, number 9780521630351.
    7. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
    8. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    9. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    10. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
    11. Nelson, Michael A, 1987. "Searching for Leviathan: Comment and Extension," American Economic Review, American Economic Association, vol. 77(1), pages 198-204, March.
    12. Browning, Edgar K & Johnson, William R, 1984. "The Trade-Off between Equality and Efficiency," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 175-203, April.
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