A Tiebout/tax-competition model

This paper analyzes a Tiebout/tax-competition model, where heterogeneity of consumer preferences is introduced into a standard tax-competition framework. Following the modern Tiebout tradition, consumer sorting in the model is achieved through the activities of profit-maximizing community developers. Once sorting is achieved, the equilibrium is equivalent to that in a standard tax-competition model with immobile, but heterogeneous, consumers. A principal lesson of the analysis is that, under capital taxation, consumers with high public-good demands are worse off than under a head-tax regime. In pursuit of high levels of public spending, high-demand communities impose high tax rates, which drive away capital. The analysis also establishes a number of other results. (C) 2000 Elsevier Science S.A. All rights reserved.