TAX COMPETITION AND REVELATION OF PREFERENCES FOR PUBLIC-EXPENDITURE

This paper considers a federal country composed of local jurisdictions that differ in their inhabitants' tastes for public goods, and which finance local public expenditure through a source-based tax on capital income. The taste for public goods is the private information of loca l governments. The central government seeks an optimal policy, in whic h grants to local governments are conditioned on local tax rates. The uninformed central government seeks both to allocate capital efficient ly among jurisdictions, and to induce jurisdictions to provide an effi cient mix of private and public consumption. It is shown that there pe rsist at this constrained optimum both some misallocation of capital a nd some violation of the Samuelson rule for optimal public good provis ion in every jurisdiction. (C) 1998 Academic Press.