The Tiebout model holds that competition for residents among
local governments forces each to provide the optimal level of local public
goods. One limitation to the argument is that although an individual can take
his labor and his capital out of a locality whose government charges him more
than the value it provides, his land remains behind.
Model a local government as a dictatorship in
order to explore the non-political constraints it faces. Assume all citizens are identical. The optimal level of local public goods costs
$10,000 per capita to produce. An adjacent polity currently produces that level
of services at that price in taxes, as per Tibout.
The dictator sets taxes at $11,000 per capita, spends $10,000
producing the optimal level of local public goods, pockets the rest. Citizens
start to leave. As they leave, the value of fixed resources, land and houses,
goes down. They continue leaving until the cost of selling their house and land
at a low price and replacing them at a higher price in the adjacent polity just
balances the advantage of paying a thousand dollars less a year in taxes. There
is then a new equilibrium with a smaller population and higher taxes. A local
dictator who is selfish and rational will adjust the tax rate to maximize his
revenue while still providing the optimal level of local public goods, since
providing more or less would, once population had adjusted, leave him poorer.
The implication of this model is that the greater the value
of living in the territory of a local government, taxes and services aside, the
higher the level of exploitative taxation we should expect. If living in
California instead of Nevada is worth $10,000 a year, California can afford to
charge $10,000 more in taxes net of the value of services before citizens start
to leave for Nevada. This looks like an explanation for why California, with a
notoriously attractive climate, also has notoriously high taxes.
California, of course, is not a dictatorship. To fit the
model more closely to reality, assume special interests within the polity, such
as organized public employees, have effectively captured control of revenue.
The threat of teacher strikes or police strikes or sanitation strikes can be
used to push wages and pensions above the market level, transferring the excess
tax revenue to the public employees. From an accounting standpoint there is no
exploitative taxation, since the cost of the services provided, including the
cost of those wages and pensions, absorbs all of the tax revenue.
This line of argument was suggested to me by an online discussion
of what the disadvantages were of living in a low tax state where one
Whenever I've fisked the stats on such things all I've been
able to see is that it is much worse to be a public employee in states without
income tax. Schools don't seem to be worse, but being a teacher is worse, as an
One implication of the model is that there should be a correlation
between the level of taxes in a state or local government and the natural
advantages of its location. To test that implication, find or calculate an estimate
of the natural advantages of different locations, taxes and services aside, and
see if it correlates with level of taxes.
[Complaints about the formatting of this post should go to blogger.com not to me. All of the body of the post was set to the same font and font size.]