Capital-tax financing and scale economies in public-input production

Contrary to the dominant view of inefficient tax competition, Oates and Schwab (1991) show that capital-tax financing of public inputs leads to efficiency when the supply of these inputs is conditioned on business investment (Oates, W.E., Schwab, R.M., 1991. The allocative and distributive implications of local fiscal competition). This paper demonstrates that the cost structure of public-input production is relevant to their proposition on efficient capital-tax financing. That proposition holds if the per-unit cost of public inputs is exogenously fixed; however, it does not hold if public-input production exhibits scale economies. Also, this paper compares our analysis with the Zodrow-Mieszkowski model. That comparison illustrates the importance of the way public inputs are rationed to private firms.     

Entry in tax competition: a note

This paper extends the tax competition analysis of public inputs to the case where the number of regions that compete for business investment is endogenous. To determine the number of competing regions, a fixed cost of regional development is introduced into the Zodrow–Mieszkowski model of public-input provision. It is shown that allowing for region entry does not affect the analytical results of inefficient public-input provision under tax competition. This paper also shows that the equilibrium number of competing regions is inefficient.     

A Note on the Composition of Public Expenditure under Capital Tax Competition

Keen and Marchand ( Journalof Public Economics, 1997, 66, 33–53) argue that undercapital tax competition, the composition of public expenditureis inefficient in that too much is spent on public inputs benefitinglocal business and too little on public goods benefiting residents.Their result depends on labor immobility. This note shows thatthe Keen-Marchand argument may not hold if both labor and capitalare mobile. An interesting case is identified where capital taxationdoes not distort the mix of public goods and public inputs, eventhough the overall level of public expenditure is inefficientlylow.     

Redistribution and regional development under tax competition

This paper considers how capital tax competition affects transfer and development policies in the presence of regional income disparity. In each country, development policies determine the number of rich (poor) regions that (do not) engage in production activities, while transfer policies redistribute income between rich and poor regions. The mix of transfer and development policies is inefficient under tax competition: conditional on the equilibrium tax rate, too much revenue is spent on development policies and too little on transfer policies. This analysis of the expenditure mix implies that development policies are used as a means of regional redistribution even if transfer policies are efficient instruments for this purpose. Moreover, it is shown that the overall level of public expenditure may be too high because of the possibility of over-development.     

Productivity-enhancing public investment and benefit taxation: the case of factor-augmenting public inputs

Government expenditure on public inputs such as human capital formation and public infrastructure can significantly affect productivity. An interesting and highly relevant policy question is whether such expenditure should be financed according to the benefit-taxation principle. Focusing on factor-augmenting public inputs, in this paper we derive the specification of the appropriate set of benefit taxes. Rather than fall on industries according to the degree to which the public input increases their productivities, these taxes must take the form of differential taxes on factor incomes. JEL Classification: H21, H54
Les investissements publics accroissant la productivité et l'imposition des avantages: le cas des intrants publics qui augmentent la productivité des facteurs de production. Les dépenses gouvernementales en intrants publics comme la formation de capital humain ou les infrastructures publiques peuvent affecter de manière significative la productivité. Une question intéressante et pertinente de politique publique est de savoir si des telles dépenses devraient être financées à l'aide d'un impôt sur les avantages ainsi dérivés. Mettant l'accent sur les intrants publics qui augmentent la productivité des facteurs, ce mémoire définit la spécification des impôts appropriés sur les avantages tirés de l'investissement public. Plutôt que de retomber sur les industries selon le degré d'accroissement de productivité qui s'ensuit, ces impôts doivent prendre la forme de taxes différentielles sur les revenus des divers facteurs de production.     

Tax competition and tax base equalization in the presence of multiple tax instruments

The literature on tax competition has argued that tax base equalization, which reduces regional disparities in tax bases, can serve as a means of internalizing horizontal and vertical fiscal externalities. This argument assumes that each government relies on a single tax base (a regional tax on mobile capital and a federal tax on savings). This paper considers the case in which a distortionary labor tax is also available. Internalizing fiscal externalities requires that while the regional capital tax base is fully equalized, a region’s equalization entitlement for the labor tax is positive when its tax base is “larger” than the average tax base of all regions. This efficient tax base equalization system is incompatible with the primary objective of fiscal equalization.