Political Support for Tax Decentralization

Abstract

Abstract We present a spatial model of a city with two unequally productive jurisdictions. City residents bear a commuting cost to work in either of the two jurisdictions. Each jurisdiction must finance a public budget with a wage and a head tax. We compare the first best optimum to tax decentralization. From the total welfare viewpoint, tax competition is always inefficient. However, majoritarian local governments may prefer the inefficient tax decentralization to the first best.