This paper considers Tiebout (1956) competition for mobile firms without restrictions on the set of tax policy instruments. Communities set taxes and provide public input goods in order to attract heterogeneous firms. In equilibrium, there is sorting of firms into communities that specialize on a certain firm type. The efficiency properties of the equilibrium allocation crucially depend on the observability of the variable that drives the congestion externality. With observable congestion drivers, the resulting equilibrium is efficient and the first-best allocation is attained through decentralized decision-making. With unobservable congestion drivers, communities use distortive input taxes in equilibrium. Nevertheless, the fiscal externality is zero. In contrast to the standard tax competition model, capital taxes are too high, but tax coordination on input taxes alone fails to achieve a welfare improvement. The model rationalizes the use of distortive source-based taxes in tax competition and questions the welfare enhancing potential of tax coordination.

Self-determination is a main rationale for fiscal decentralization, but seldomly analyzed in model of local public finance. This paper studies the equilibrium effects of local fiscal autonomy, accounting for preferences of self-determination. We propose a quantifiable structural equilibrium model where heterogeneous households sort across municipalities in response to progressive income taxation and public good provision. We calibrate the model to municipalities in the Canton of Bern in Switzerland using rich household-level and municipal data. In particular, we exploit quasi-experimental policy variation in voting rights to quantify benefits from self-determination and employ machine learning methods to represent the local political process. We find that restricting local fiscal autonomy decreases welfare by 1% for (almost) all households.

To study the distribution of economic activity across space and the effects of place-based policies, I develop a model of the location choice of new establishments incorporating taxes, monopsonistic labor markets, and spillovers. Estimates using administrative data from Germany indicate that establishments generally have a preference for lower taxes, as well a preference for lower worker outside options which enable establishments to pay lower wages. The degree to which various types of productivity spillovers matter in the location decision of establishments varies greatly between industrial sectors. I also quantify the effects of a counterfactual place-based policy and find that commuting zones display highly heterogeneous wage and economic activity responses to the same policy due to differing degrees of labor market power across space.

This study reveals how an interaction between tax competition and the political overrepresentation of the rich can collectively impede redistribution in response to rising inequality. We develop a model of capital tax competition between countries, each comprising two classes: the rich and the poor. Income bias in political attention creates the overrepresentation of the rich in each country. First, we show that tax competition diminishes the political attention level of the poor, amplifying the rich's political influence. Hence, tax competition reduces capital taxation not only through conventional economic channels but also by altering the political power in favor of the rich. Remarkably, from a global perspective, the attention level of the poor is under-provided for their own benefit. Second, rising inequality should increase the poor’s political attention level, inducing higher taxation. However, increasing inequality is more likely to reduce taxation under tax competition compared to a closed economy.