The (Im)Possibility of Overprovision of Public Goods in Interjurisdictional Tax Competition

Thomas Eichner and Thorsten Upmann

FinanzArchiv: Public Finance Analysis, 2014, vol. 70, issue 2, 218-248

Abstract: We extend the classical tax-competition framework of Zodrow and Mieszkowski (1986) by modeling involuntary unemployment and by allowing for labor taxation as a second source of public funds. Even though the framework of the Zodrow-Mieszkowski model is extended into two dimensions, we are able to characterize the signs of both tax rates and the provision level of the public good: for a large class of production functions (including CES), tax competition is characterized by underprovision of public goods, and by positive taxes on both labor and capital. Since this holds true (with some qualifications) for various labor market models (including efficient bargains, the monopolistic union, and competitive labor markets), we can safely conclude that the results of Zodrow and Mieszkowski survive some important and substantial modifications of the framework, and are thus more general than recently suggested elsewhere.

Keywords: capital and labor tax competition; overprovision of public goods; involuntary unemployment; efficient bargains; monopolistic union (search for similar items in EconPapers)
JEL-codes: H21 H71 H72 J51 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1628/001522108X681360

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