Public Provision and Local Income Tax Competition

51 Pages Posted: 8 Apr 2016

See all articles by Florian Kuhlmey

Florian Kuhlmey

University of Basel

Beat Hintermann

University of Maryland - Department of Agricultural & Resource Economics

Date Written: March 3, 2016

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 non-linearly on the levels of spillovers and rivalry.

Keywords: publicly provided goods, tax competition, fiscal federalism, decentralization, free-riding, welfare analysis

JEL Classification: H210, H400, H770, Q580

Suggested Citation

Kuhlmey, Florian and Hintermann, Beat, Public Provision and Local Income Tax Competition (March 3, 2016). CESifo Working Paper Series No. 5789, Available at SSRN: https://ssrn.com/abstract=2760254 or http://dx.doi.org/10.2139/ssrn.2760254

Florian Kuhlmey

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Beat Hintermann (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

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