A note on the composition of public expenditure under capital tax competition

Keen and Marchand ( Journal of Public Economics, 1997, 66, 33-53) argue that under capital tax competition, the composition of public expenditure is inefficient in that too much is spent on public inputs benefiting local business and too little on public goods benefiting residents. Their result depends on labor immobility. This note shows that the Keen-Marchand argument may not hold if both labor and capital are mobile. An interesting case is identified where capital taxation does not distort the mix of public goods and public inputs, even though the overall level of public expenditure is inefficiently low.