Tax competition, tax exporting and higher-government choice of tax instruments for local governments

Abstract

This paper presents a theoretical model with tax exporting due to external ownership of a fraction θ of the land in each local jurisdiction. There are n local jurisdictions in a metropolitan area ( n≥1) and many metropolitan areas in a world economy. The paper examines the usage of business property taxes and source-based wage taxes by local jurisdictions, first in the presence of and then in the absence of residence-based lump-sum taxes, and how this depends on θ and n. The paper then examines the choice of a world, national or state government as to whether to allow local (metropolitan or sub-metropolitan) governments to use business property taxes, wage taxes or both, assuming that the local governments choose the actual tax rates.