THE PERSISTENCE AND INEFFICIENCY OF PROPERTY-TAX FINANCE OF LOCAL PUBLIC-EXPENDITURES

I both characterize and evaluate equilibrium outcomes in multiple-jurisdiction economies with proPerty and land taxation but where direct taxation of residents is not possible. The model contains perfectly mobile capital and population, and competitive, entrepreneurial governments that choose local taxes and expenditures to maximize after-tax land rent. When the cost of public goods is proportional to population the property tax emerges as the sole source of local finance, even though the land tax has no deadweight loss. It is shown that equilibria are not constrained efficient in general; hence decentralized decision-making is not consistent with the best use of the available tax instruments.