In this paper, the author analyzes the behavior of local governments in capital taxation when the financial choices in terms of the quality of public goods are made done by a central planner. More specifically, he asks the question of whether a local government has an interest in taxing the mobile factor in addition to the tax on representative households. Through a comparison of social welfare given the strategies chosen by local governments, the author shows that whatever the quality and cost of public goods, a local government always has an interest in taxing the mobile factor. This leads to a Nash equilibrium in the dominant strategy in their model.
Tax competition public goods quality welfare taxation