In this paper, the authors analyze the behavior of local governments on capital taxation when the financial choices in terms of a public good quality are done by a central planner. More specifically, they ask the question whether a local government has an interest to tax the mobile factor in addition to the tax on representative households or not. The authors show, through a comparison of social welfare given the strategies chosen by the locals governments, that whatever the quality of the public good and its cost is, a local government always has an interest to tax the mobile factor. This leads to a Nash-equilibrium in dominant strategy in their model.
tax competition public goods taxation quality welfare