THE TAXATION OF MOBILE CAPITAL BY CENTRAL CITIES

This paper examines the properties of capital taxation within a metropolitan environment. It is demonstrated that when the boundaries of the central city jurisdiction fail to incorporate the entire metropolitan community, the central city can redistribute wealth from suburban land-owners to its residents. In effect, the central city can exploit its suburbs. It does so through capital tax or subsidy policies which reduce employment opportunities in the metropolis. Hence, central city fiscal policy will have an anti-development bias. It is also shown that, unlike most models of fiscal competition, the fear of capital outflight will not necessarily lead to the underprovision of public services. Under some circumstances, public services may actually be overprovided.