Interjurisdictional tax competition for domestic and foreign capital

This paper examines the efficient provision of local public goods when jurisdictions compete for both domestic and foreign capital. Capital is freely mobile between jurisdictions in the home country, but capital owners will incur migration costs if investing abroad. Since the supply of foreign capital is not completely elastic, the traditional result of under-provision of local public goods found in the literature on tax competition may not hold. Furthermore, the less mobile that foreign capital is, the more likely it is that foreign capital will be taxed more heavily than domestic capital. If both types of capital are complementary to the locally untaxed labor, then jurisdictions will always tax foreign capital, and they may even subsidize domestic capital if it is sufficiently difficult to move the capital abroad.