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

Purpose – 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. Design/methodology/approach – 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. Findings – 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. Research limitations/implications – 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. Practical implications – Subnational governments need not shy away from capital taxes when funding government programs. Originality/value – This paper contributes to the investigation of subnational tax incidence.