Mutsumi Matsumoto

A note on tax competition and public input provision

Abstract This note reconsiders and extends the tax competition analysis of Zodrow and Mieszkowski (Journal of Urban Economics 19, (1986) 356–370) regarding public inputs. In their model with capital mobility, both the underprovision and overprovision of public inputs may result from tax competition. However, this note shows that when firms are also mobile across jurisdictions, local governments competing for capital choose inefficiently low levels of public inputs.

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.