John Douglas Wilson

A theory of interregional tax competition

A general equilibrium model is constructed to study tax competition, where local governments compete for capital by holding down property tax rates and public expenditure levels. An exact definition of tax competition is provided, and both the existence and nonexistence of tax competition are shown to be theoretically possible. It is argued, however, that tax competition must occur under empirically reasonable conditions. Inefficiency in public production is also explicitly modeled. The amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms.

Tax competition with interregional differences in factor endowments

Abstract This paper studies ‘tax competition’ between two regions that tax interregionally mobile capital to finance local public goods. In the Nash equilibrium, residents of a relatively small region, measured by population size, are better off than residents of the large region; and they are better off than they would be under the economys Pareto efficient tax rates, if their region is sufficiently small. These results are compared with related findings in the international trade and local public economics literatures. The same results are proved for a model where both capital and labor are taxed to satisfy an exogenous expenditure requirement.

Capital tax competition: bane or boon

This paper reviews potential advantages and disadvantages of capital tax competition. Tax competition may introduce, mitigate, or exacerbate inefficiencies in both the private sector and the public sector. In different models, tax competition may either limit or increase public expenditures and taxes on mobile factors, with differing welfare consequences. We also discuss the implications of tax competition for redistributive policies and for policies dealing with risk, and we identify some of the possible empirical implications of tax competition. D 2003 Elsevier B.V. All rights reserved.

Tax competition with two tax instruments

Abstract Models of tax competition among local or regional governments typically assume that only a source-based tax on capital income is available. This paper presents a model where a wage tax is also available and shows that small regions choose not to tax capital income, given that it can only be taxed on a source basis. However, the model also yields the conclusion from previous tax competition models that local public goods are underprovided. In contrast, government use of the available tax instruments is efficient when both source- and residence-based capital taxes are available, even in the absence of wage taxation.

Tax competition with parasitic tax havens

We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries, and these countries use resources in an attempt to limit the transfer of tax revenue from capital taxation to the havens. We demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolition of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens. We argue that these results extend to the case where there are also taxes on wage income that involve administrative and compliance costs.

Optimal road capacity in the presence of unpriced congestion

Abstract This paper studies how the optimal capacity of a road is affected by a pricing constraint which keeps the toll fixed below its optimal value. The answer is found to depend on the value of the price elasticity of travel demand at the second-best optimum. The pricing constraint lowers the optimal capacity, if the price elasticity is sufficiently high. But under reasonable assumptions, the pricing constraint raises the optimal capacity, if the price elasticity is less than the ratio of the consumer price of travel to the private congestion cost at the second-best optimum. This ratio cannot be less than one.

Optimal property taxation in the presence of interregional capital mobility

Abstract A single regions optimal property tax policy is examined in a model with interregional capital mobility. In this model, property taxation is used to finance local public expenditures. Different tax rates may be imposed on property used to produce goods which are traded between regions and property used to produce nontraded goods (e.g., residential property). The key determinants of the difference between the optimal tax rates are identified, and it is argued that there exists a bias towards relatively low tax rates on property used to produce traded goods. The role of labor mobility is also investigated.

Income Redistribution with Well-Informed Local Governments

This paper examines the problem of redistributing incomeacross jurisdictions and to mobile workers within jurisdictionswhen local governments have better information than the centralgovernment about local production conditions. Under the centralgovernment‘s optimal policy, the subsidies or taxes that localgovernments provide to mobile workers normally depend on whetherthese governments are net recipients or net donors of interjurisdictionalincome transfers. Moreover, the public-input decisions of somelocal governments are distorted. The analysis demonstrates thatit may not be desirable to harmonize social policies across jurisdictions,even when the beneficiaries are quite mobile.

Imperfect mobility and local government behaviour in an overlapping-generations model

Abstract This paper reconsiders the implications of land-value-maximizing local governments in an overlapping-generations model with imperfect mobility. Specifically, residents develop an ‘attachment to place’ or ‘location-specific capital’ once they reside in a town for a single time period. The analysis shows that attempts by governments to capture the resulting rents from less-mobile individuals create inefficient migration, leave all workers worse off in an ex ante sense, and place relatively high burdens on those workers who have high migration costs. Public good levels are also inefficiently chosen.

The effect of potential emigration on the optimal linear income tax

Abstract This paper amends a standard model of optimal linear income taxation to allow individuals to escape taxation by migrating. The income tax is used only to redistribute income in this model. It is found that, if individuals with low and high ability levels are prevented from migrating, then the optimal marginal tax and poll subsidy increase. But preventing migration at ability levels in some intermediate interval lowers the optimal marginal tax.