A Tax Competition Analysis of Congestible Public Inputs

Abstract

This paper investigates the provision of congestible local public inputs within a tax competition framework. Public input provision is financed by a business capital tax and by a profits tax on firms as a congestion tax. With this tax system, local tax and expenditure policies are inefficient because of potential capital outflows. The tax mix is inefficient in that the profits tax rate is too high relative to the capital tax rate. The level of public input provision is inefficiently low. Focusing on expenditure inefficiency, this analysis of public inputs is compared with Wilson's analysis (Journal of Urban Economics, 1995, 38, 333–356) of congestible public goods.