POPULATION MOBILITY AND CAPITAL TAX COMPETITION

We introduce imperfect population mobility to the capital tax competition literature. We study the efficiency of different tax regimes by comparing Nash equilibrium allocations to those that are constrained efficient. We conclude that decentralized control of taxes on locally employed capital is undesirable from an efficiency perspective. In addition we show that with population mobility a decentralized jurisdiction may be able to offset the externalities generated by capital tax competition, with the result that Nash equilibria can be efficient. We prove that this occurs in environments where one jurisdiction makes a positive transfer of resources to the other to control immigration.