Tax Competition with Mobile Labor, Residents, and Capital

69 Pages Posted: 13 Jun 2019 Last revised: 24 Aug 2020

See all articles by David R. Agrawal

David R. Agrawal

University of Kentucky - James W. Martin School of Public Policy and Administration; University of Kentucky - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

William H. Hoyt

University of Kentucky

John Douglas Wilson

affiliation not provided to SSRN

Date Written: May 27, 2019

Abstract

We construct a unifying model of optimal decentralized policymaking that includes multiple tax and spending policies with mobile workers, mobile residents, and mobile capital. Local governments are atomistic with respect to the world capital market, but are linked by commuting patterns, the cost of which is endogenously determined by congestion. Commuting gives rise to “tax exporting,” with a higher capital tax in the (central) city partially borne by non-resident commuters from the suburbs, allowing the capital tax to remain optimal even when head taxes are available. More generally, employment-based taxes are valuable instruments only when jurisdictions are net recipients of commuters, while jurisdictions that are net providers of commuters will choose to rely on the use of residential-based taxes. Jurisdictions can combine labor and resident taxes to effectively tax commuters. Even though jurisdictions are price-takers in the world capital market, they strategically react to the policies of other small jurisdictions due to commuting linkages.

Keywords: tax competition, local governments, commuting, labor mobility

JEL Classification: H2, H4, H7, R5

Suggested Citation

Agrawal, David R. and Hoyt, William H. and Wilson, John Douglas, Tax Competition with Mobile Labor, Residents, and Capital (May 27, 2019). Available at SSRN: https://ssrn.com/abstract=3394617 or http://dx.doi.org/10.2139/ssrn.3394617

David R. Agrawal (Contact Author)

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

433 Patterson Office Tower
Lexington, KY 40506-0027
United States
859-257-8608 (Phone)

HOME PAGE: http://www.uky.edu/~drag222/

University of Kentucky - Department of Economics ( email )

Lexington, KY 40506
United States

HOME PAGE: http://www.uky.edu/~drag222/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.uky.edu/~drag222/

William H. Hoyt

University of Kentucky

Lexington, KY 40506
United States

John Douglas Wilson

affiliation not provided to SSRN

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