Using an agency model of firm behavior, the paper analyzes whether the cost of investment should be tax exempt. The findings suggest that, when managers engage in wasteful capital expenditures, welfare may decline if the cost of investment is tax deductible, as commonly advocated. The extent to...

Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments' influences the way local governments...

This paper examines the efficient provision of goods in two-sided markets and characterizes optimal specific and ad-valorem taxes. We show that (i) a monopoly may have too high output compared to the social optimum; (ii) output may be reduced by imposing negative value-added taxes (subsidy) or...

According to theory, capacity equalization grants cause local governments to internalize the effects of their tax policies on revenues of neighboring jurisdictions and so raise equilibrium tax rates. This paper empirically analyzes the incentive effects of equalizing transfers on business tax...