Sub-metropolitan Tax Competition with Household and Capital Mobility

This paper investigates the efficiency properties of tax competition between submetropolitan jurisdictions when capital, residents and workers are mobile, and both households and firms compete for local land markets. We analyze two decentralized equilibria: (1) with a local tax on residents and two separate local taxes on capital and land inputs, efficiency is achieved and the existence of a marginal fiscal cost due to residents' mobility is revealed; (2) combination of the taxes on capital and land inputs into a single business property tax leads local authorities to charge inefficiently high taxation on capital. We show that capital mobility induces a reduction in the business land taxation and local public inputs are used to offset the distorting effects of the property tax, accounting for the distorting impact of workers' mobility