Taxes, Commuting and Spillover in the Metropolis
46 Pages Posted: 7 Sep 2019 Last revised: 21 Jan 2025
Date Written: January 20, 2025
Abstract
This paper studies local governments' public policies in a metropolitan area plagued by traffic congestion, where both residents and workers consume local public goods. We develop a new spatial sub-metropolitan tax competition model which features a central city surrounded by suburban towns linked by mobile capital and mobile residents who commute to work. We show that Pareto-efficiency is achieved if towns can retain their workers using labor subsidies. Otherwise, traffic congestion in the city is inefficiently high and local governments respond by setting inefficient public policies: (1) the city over-taxes capital and under-taxes residents, which leads to too little capital and too many residents in the city; (2) local public goods are under-provided in the city and over-provided in the towns.
Keywords: Tax competition, Urban economics, Traffic congestion, Public goods, Mobility
JEL Classification: H71, H72, R50, R51
Suggested Citation: Suggested Citation