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Erschienen in: Review of Regional Research 1/2017

25.10.2016 | Original Paper

Locational efficiency in a federal system without land rent taxation

verfasst von: Robert Philipowski

Erschienen in: Review of Regional Research | Ausgabe 1/2017

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Abstract

We show that in a federal state with mobile population labor and capital income taxes do not suffice to achieve efficiency in general, but that they do suffice if the federation consists of just two types of regions. In the general case we study the resulting second-best problem and find that in the second-best optimum the level of public good provision is efficient, but neither capital nor labor is allocated efficiently.

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Fußnoten
1
This insight goes back to Wildasin (1980).
 
2
See also Wellisch (2000, Chapter 3).
 
3
At first sight land rent maximization for a given federation-wide utility level and utility maximization under a budget constraint involving land rents might seem to be dual problems. However, under the assumption of perfect mobility, which implies that utility is the same across regions, these two objectives lead to problems of completely different nature: If regions maximize utility they have a common objective and will therefore cooperate – even if they only care about the utility of their own inhabitants. If however each region maximizes its local land rent they have conflicting objectives, so that one ends up with a game-theoretical problem.
 
4
In particular, this assumption implies that labor is supplied inelastically.
 
5
In principle, an efficient allocation could involve complete depopulation of one or several regions. Since this does not occur in practice, we exclude this possibility.
 
6
If there were no public good (so that \(\partial U/\partial Z_{i}\equiv 0\) and \(C_{i}\equiv 0\) for all \(i\)), (2) would simplify to \(X_{1}=\ldots=X_{n}\), and consequently (8) would reduce to the standard efficiency condition \(\partial F_{1}/\partial L_{1}=\ldots=\partial F_{n}/\partial L_{n}\). The reason why this condition has to be replaced with (8) is that workers are not only a production factor, but also consumers of the public good in the region where they work.
 
7
One can imagine the wage tax \(\tau_{w}^{i}w_{i}\) in region \(i\) as consisting of a congestion fee equal to the marginal congestion cost \(\partial C_{i}/\partial L_{i}(Z_{i},L_{i})\) and a remainder term whose purpose is to contribute to finance the efficient level of public good provision. Then (15) tells us that efficiency requires this remainder term to be the same in all regions.
 
8
One can easily see this by multiplying (17) with \(L_{1}\) and (18) with \(L_{2}\) and then summing up (17)–(20), which yields (5).
 
9
See Appendix B for the calculations.
 
Literatur
Zurück zum Zitat Hülshorst J, Wellisch D (1996) Optimal local environmental and fiscal policies in second-best situations. Finanzarchiv 53:387–410 Hülshorst J, Wellisch D (1996) Optimal local environmental and fiscal policies in second-best situations. Finanzarchiv 53:387–410
Zurück zum Zitat Wellisch D (2000) Theory of Public Finance in a Federal State. Cambridge University Press, CambridgeCrossRef Wellisch D (2000) Theory of Public Finance in a Federal State. Cambridge University Press, CambridgeCrossRef
Zurück zum Zitat Wellisch D, Hülshorst J (2000) A second-best theory of local government policy. Int Tax Public Finance 7:5–22CrossRef Wellisch D, Hülshorst J (2000) A second-best theory of local government policy. Int Tax Public Finance 7:5–22CrossRef
Zurück zum Zitat Wildasin DE (1980) Locational efficiency in a federal system. Reg Sci Urban Econ 10:453–471CrossRef Wildasin DE (1980) Locational efficiency in a federal system. Reg Sci Urban Econ 10:453–471CrossRef
Metadaten
Titel
Locational efficiency in a federal system without land rent taxation
verfasst von
Robert Philipowski
Publikationsdatum
25.10.2016
Verlag
Springer Berlin Heidelberg
Erschienen in
Review of Regional Research / Ausgabe 1/2017
Print ISSN: 0173-7600
Elektronische ISSN: 1613-9836
DOI
https://doi.org/10.1007/s10037-016-0109-0