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