TAX COMPETITION WITH INTERREGIONAL DIFFERENCES IN FACTOR ENDOWMENTS

This paper studies 'tax competition' between two regions that tax interregionally mobile capital to finance local public goods. In the Nash equilibrium, residents of a relatively small region, measured by population size, are better off than residents of the large region; and they are better off than they would be under the economy's Pareto efficient tax rates, if their region is sufficiently small. These results are compared with related findings in the international trade and local public economics literatures. The same results are proved for a model where both capital and labor are taxed to satisfy an exogenous expenditure requirement.