TAX COMPETITION IN THE PRESENCE OF INTERJURISDICTIONAL EXTERNALITIES: THE CASE OF CRIME PREVENTION

The paper analyzes the effect of fiscal competition when local governments choose the level of public goods that generate spillover effects elsewhere. For instance, law enforcement activities affect both the crime level in the jurisdiction providing the good and in neighboring communities. The model shows that when local governments rely on capital taxation to finance these expenditures the spillover effects may not lead to an inefficient provision of public goods as predicted by the tax competition literature. In the model, capital is costlessly mobile and offenders relocate responding to differential criminal opportunities and differential local law enforcement efforts. Copyright Blackwell Publishing, Inc. 2007