Capital Income Taxation, Cross-Ownership, and the Structure of Public Spending

This paper analyses non-cooperative provision of public consumption goods and public production factors. Contrary to previous literature, a number of situations is identified where public consumption goods are oversupplied and public production factors are undersupplied. With source and residence-based capital taxes available, cross-ownership may lead to either absolute and relative underprovision of public inputs (as is intuitive) or to absolute and relative overprovision of public inputs. If only the source-based tax is available, then relative underprovision of the public production factor may occur even if the public consumption good is undersupplied in absolute terms. If only the residence-based tax is available, then relative underprovision of the public production factor results even in the absence of cross-ownership. This relative underprovision of public production factors may or may not be increased by cross-ownership.