Local Tax Competition and Indirect Tax Exportation

This article studies capital tax competition in a model with external ownership of fixed factors. A simple condition is provided on the feasibility of an efficient Nash equilibrium, which depends only on factor income shares, the elasticity of substitution in production, and the size of the public sector. For a reasonable setting and related values, tax exporting incentives are too weak to cancel out the positive externality of tax competition, leading to the conclusion that the most likely outcome is that there will be an undersupply of public activity.