Do subnational business taxes reduce a region's competitiveness? A computational general equilibrium analysis

This paper's purpose is to investigate the claim that capital taxes imposed by a subnational government reduce the economic competitiveness of the geographic area in which these taxes are imposed.

A two‐region, four‐good, three‐factor computational general equilibrium model of the USA is constructed. Simulations are performed to represent US state governments replacing wage taxes with capital taxes.

Household utilities rose when wage taxes were replaced by capital taxes, contradicting the conventional wisdom that capital taxes are harmful to a region's residents.

As with all computational economic models, there are simplifications in this paper's model that abstract from reality and may limit the applicability of model results to the real world.

Subnational governments need not shy away from capital taxes when funding government programs.

This paper contributes to the investigation of subnational tax incidence.