Tax Competition, Income Differentials and Local Public Services

Posted: 16 Jan 2002

See all articles by Eric Smith

Eric Smith

University of Essex - Department of Economics

Tracy J. Webb

Swansea University - Department of Economics

Abstract

This paper examines strategic tax setting between fiscal authorities in the presence of mobile workers who locate across these jurisdictions in response to differing tax structures and congestable local public amenities. We find that the nature of the tax setting outcomes depend crucially on the proximity between cities. For "distant" cities with the same size populations, the pressure on tax rates of a more mobile workforce depends on the whether mobile workers are net beneficiaries or net contributors. If mobile workers are either high or low income earners, cities lower tax rates. If mobile workers are middle income earners, cities raise tax rates. For "close" or neighbouring cities, workers locate in one of the cities and tax rates and local public amenities are dispersed.

Keywords: Tax competition, migration, local public goods, coordination equilibria

Suggested Citation

Smith, Eric and Webb, Tracy J., Tax Competition, Income Differentials and Local Public Services. International Tax and Public Finance, Vol. 8, No. 5-6, pp. 675-691, November 2001. Available at SSRN: https://ssrn.com/abstract=296572

Eric Smith (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Tracy J. Webb

Swansea University - Department of Economics ( email )

Swansea SA2 8PP
United Kingdom

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