TEL  Vol.4 No.9 , December 2014
Local Taxation, Private-Public Consumption Complementarity, and the Optimal Number of Jurisdictions
ABSTRACT
Viewing local finances under the approach to private-public consumption complementarity, we conclude that foot voting and tax competition become extinct when the (capital) tax structure across jurisdictions is the one forging close ties between the burgher and his/her jurisdiction. The attachment of the burgher to the local public goods offered and to the local business activity prevents labor and capital mobility. The optimal number of jurisdictions is that which is conducive to the adoption of that local taxation that fosters such an attachment; taxation made possible by capitalizing upon private-public consumption complementarity. The intuitive appeal of this result is then contemplated within the broader framework of fiscal policymaking accommodative of citizen heterogeneity. In view of complementarity, there appears to be scope for decentralized treatment of citizen preferences via the localities, leaving the treatment of endowment differences to the central government.

Cite this paper
Soldatos, G. (2014) Local Taxation, Private-Public Consumption Complementarity, and the Optimal Number of Jurisdictions. Theoretical Economics Letters, 4, 815-820. doi: 10.4236/tel.2014.49103.
References
[1]   Tiebout, C. (1956) A Pure Theory of Local Expenditures. Journal of Political Economy, 64, 416-424.
http://dx.doi.org/10.1086/257839

[2]   Hoyt, W. (1991) Property Taxation, Nash Equilibrium and Market Power. Journal of Urban Economics, 30, 123-131. http://dx.doi.org/10.1016/0094-1190(91)90049-D

[3]   Perroni, C. and Scharf, K.A. (2001) Tiebout with Politics: Capital Tax Competition and Constitutional Choices. Review of Economic Studies, 68, 133-154. http://dx.doi.org/10.1111/1467-937X.00163

[4]   Fiorito, R. and Kollintzas, T. (2004) Public Goods, Merit Goods, and the Relation between Private and Government Consumption. European Economic Review, 48, 1367-1398.
http://dx.doi.org/10.1016/j.euroecorev.2004.01.004

[5]   Linnemann, L. (2006) The Effect of Government Spending on Private Consumption: A Puzzle? Journal of Money, Credit and Banking, 38, 1715-1735. http://dx.doi.org/10.1353/mcb.2006.0094

[6]   Bouakez, H. and Rebei, N. (2007) Why Does Private Consumption Rise after a Government Spending Shock? Canadian Journal of Economics/Revue Canadienne d’Economique, 40, 954-979.
http://dx.doi.org/10.1111/j.1365-2966.2007.00438.x

[7]   Ganelli, G. and Tervala, J. (2009) Can Government Spending Increase Private Consumption? The Role of Complementarity. Economics Letters, 103, 5-7. http://dx.doi.org/10.1016/j.econlet.2009.01.007

[8]   Ogura, S. and Yohe, G. (1977) The Complementarity of Public and Private Capital and the Optimal Rate of Return to Government Investment. Quarterly Journal of Economics, 91, 651-666.
http://dx.doi.org/10.2307/1885887

[9]   Bucci, A. and Del Bo, C. (2009) On the Interaction between Public Investment and Private Capital in Economic Growth. UNIMI—Research Papers in Economics, Business, and Statistics, Universitá degli Studi di Milano Unimi-1092, Universitá degli Studi di Milano, Milano.

[10]   Figuières, C., Prieur, F. and Tidball, M. (2013) Public Infrastructure, Non-Cooperative Investments, and Endogenous Growth. Canadian Journal of Economics/Revue Canadienne d’Economique, 46, 587-610. http://dx.doi.org/10.1111/caje.12024

[11]   Eichner, T. and Runkel, M. (2012) Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply. American Economic Review, 102, 2349-2357.
http://dx.doi.org/10.1257/aer.102.5.2349

[12]   Gahvari, F. and Micheletto, L. (2012) Monetary Policy and Redistribution: What Can or Cannot Be Neutralized with Mirrleesian Taxes. Uppsala Center for Fiscal Studies Working Paper 2012:5. http://ucfs.nek.uu.se/

[13]   Bahl, R. (1984) Financing State and Local Government in the 1980s. Oxford University Press, New York.

[14]   Ravn, M., Schmitt-Grohe, S. and Uribe, M. (2006) Deep Habits. Review of Economic Studies, 73, 195-218. http://dx.doi.org/10.1111/j.1467-937X.2006.00374.x

[15]   Wellisch, D. and Hülshorst, J. (2000) A Second-Best Theory of Local Government Policy. International Tax and Public Finance, 7, 5-22. http://dx.doi.org/10.1023/A:1008749628237

[16]   Casella, A. (2001) The Role of Market Size in the Formation of Jurisdictions. Review of Economic Studies, 68, 83-108. http://dx.doi.org/10.1111/1467-937X.00161

[17]   Casella, A. and Feinstein, J.S. (2002) Public Goods in Trade: On the Formation of Markets and Jurisdictions. International Economic Review, 43, 437-462.
http://dx.doi.org/10.1111/1468-2354.t01-1-00022

[18]   Auffhammer, M. and Carson, R.T. (2009) Exploring the Number of First-Order Political Subdivisions across Countries: Some Stylized Facts. Journal of Regional Science, 49, 243-261.
http://dx.doi.org/10.1111/j.1467-9787.2008.00583.x

[19]   Figuières, C. and Hindriks, J. (2001) Matching Grants and Ricardian Equivalence. Center for Operations Research and Econometrics (CORE) Discussion Paper No 2001048, Université catholique de Louvain, Louvain-la-Neuve.

[20]   Hoyt, W. (2005) The Assignment and Division of the Tax Base in a System of Hierarchical Governments. Institute for Federalism and Intergovernmental Relations Working Paper No 2005-07, University of Kentucky, Lexington.

 
 
Top