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Agglomeration,Tax,andLocalPublicGoodsAn-MinWangDao-ZhiZengyDecember29,2011AbstractInthispaper,weexploretheinteractionbetweentaxationandalocalpublicgood(LPG)@tosee@howitimpactsthespatialpatternintheframeworkofneweconomicgeography(NEG).InthebenchmarkcaseofapureLPG,thesystemdisplaysasimilarlocationpatterntotheexistingNEGtaxationmodel,althoughthetaxreducesthemarketsizeofmanufac-turedgoods.However,whenweconsidertheinherentcongestionofanLPG,we ndanewagglomerationforceduetothedemandoftheLPGandanewdispersionforceduetoitscongestion.Asaresultoftheirinteraction,thecongestabilityis@crucialin@determiningthespatiallocationpattern.JELClassi cation:F12,H20,H41,R12Keywords:tax,agglomeration,dispersion,congestiblelocalpublicgood1IntroductionTherelationshipbetweenfactormobilityandtheregionalprovisionof@a@localpublicgood(LPG)haslongbeenaconcernofeconomists.Previousclassicliteraturecanbeclassi edintotwocategories.Ontheonehand,literatureontaxcompetitiondemonstratesthattaxcompetitionleadstoa\racetothebottomandunderprovisionofLPGsamongjurisdictions(seeWilson,1999,foracompletesurvey).Ontheotherhand,Tiebout(1956)andmanyimportantsubsequentstudiesfocusontheefficiencyofLPGprovisioninasystemofcompetingjurisdictions.TheyoffervariouscombinationsofLPGandtaxation.Inadditiontotheabove,recently,aseparateliteraturefocusesonhowtaxcompetitionimpactsonindustriallocationbyuseofageneralequilibriumframeworkcalledneweconomicgeography(NEG).Thesestudiesrestheavilyonthecore-periphery(CP)modelofKrugman(1991).Interestingly,undertheNEGframework,taxcompetitionmaygeneratedifferentresultsfromclassictaxcompetitionmodelsduetothehump-shapedagglomerationrents.TheoreticalGraduateInstituteofUrbanPlanning,NationalTaipeiUniversity,wam@iris.seed.net.twyGraduateSchoolofInformationSciences,TohokuUniversity,E-mail:zeng@se.is.tohoku.ac.jp1papersalongthislinehavebeenwrittenbyKindetal.(2000),LudemaandWooton(2000),AnderssonandForslid(2003),Baldwinetal.(2003)BaldwinandKrugman(2004),andBorckandPuger(2006).Inaddition,Ihara(2008)considerthatlocalpublicgoodsareinputsintoproductiontoanalyzetheprovisionefficiencyofLPGs.Despitegreatprogressintheliterature,someimportantissuesareworthyoffurtherdiscussion.Inparticular,mostpapersfocuson\taxcompetitiontoanalyzetheimpactofataxdifferentialonthelocationofmobilefactors,resultingina\racetothebottomortaxharmonization.AlthoughtheproductionofanLPGisinseparablefromLPGconsumption,itisnotsufficientlyexploredintheliterature.Forexample,althoughAnderssonandForslid(2003)andBaldwinetal.(2003;Chapters15,16)includetheLPGproductionintheirmodels,theylimittheirstudytothecaseofa\pureLPGwithoutcongestion.Furthermore,theauthorsassumethattheLPGisproducedusingthesamecompositeoftheagriculturalgoodandthemanufacturedgoodasinconsumers'utilityfunction.Asaresultofthis,themarketsizeofprivatesectorsandthewagerateareindependentofthetaxrate.Therefore,thesymmetrictaxrateisneutralintheNEGframework.Ontheonehand,thisassumptionissuccessfultosimplifytheirmodels@toderivea@taxgame.However,italsomakesthesymmetrictaxrateinessentialforanagglomerationpattern.Furthermore,ifthe@LPGproduction@usesadifferentfractionofmanufacturedgoodsfromthatintheconsumers'utilityfunction,someresultsoftaxcompetitioninpreviouspapersmaynothold.Thatisbecausetheirtaxrevenueislinearinthetaxrateandtheymustuseaspeci cfunctionalformsothatthegovernment'sobjectiveisconcaveinthetaxratetoobtainaninteriorsolution(BaldwinandKrugman2004,BorckandPuger2006).TheinteractionbetweentaxationandLPGsremainsasalientissueforthelocationpatternsinceitinducesanewtensionbetweenthedispersionforceandtheagglomerationforceintheCPmodel.ThepurposeofthispaperistoaddseveraldistinctivefeaturesneglectedinpreviousworkdiscussingtaxationandLPGsintheeconomic-geographyframework.Manyexistingpolicies,suchastaxrefunds,thegrantofaconsumptioncoupon(voucher),andtheexpansionofdomesticdemand,suggestthattaxrevenuehasanimpactonthemarketsizeofprivategoods.Predicatingthereactionofconsumers,agovernmentchoosesasuitabletaxratetoachieveitspublicobjectives.Therefore,the rstfeatureofthispaperistodifferentiatetheinputfractionofmanufacturedgoodsintheLPGproductionfromtheconsumptionfractionofmanufacturedgoodsintheprivatesector.Inthisway,thetaxrevenuehasanimpactonthemarketsizeofprivategoodsandisconcaveinthetaxrate.Theconcavetaxrevenueisanimportantfeaturecapturingtheessentialtrade-offthatisattheheartofanytaxcompetitionmodel.Governmentslikeahightaxrevenue@but@alowtaxrate.Thismakesitpossibletoanalyzehowthereducedmarketofmanufacturedgoodsaffectstheallocationofthemobilefactor.Topreventthemodelfrombeingtoocomplicated,weassumethattheinputofLPGproductionisunskilledlaboronly.2Next,asoursecondstrategicfeature,weconsideraneconomyofonestatecontainingtworegions.Thecentralgovernmentinitiallychoosessymmetrictaxratesbetweentworegions.Moreprecisely,wefollowBaldwinandKrugman(2004)andAnderssonandForslid(2003)byconsideringproportionalincometaxbuthavenotaxgame(competition).WealsoassumethattaxrevenueisonlyusedtoproducetheLPGthatisconsumedbyeveryresidentinthesameregion.Hence,inthemodel,thereisadditional