Education, mobility of labour and tax competition

We show that wage-tax financed subsidies encourage investment in risky education and offer welfare gains. Tax competition and labour mobility may lead to substantial erosion of regional taxation. On the other hand, mobility insures against region-specific shocks encouraging investment in education. Thus, welfare effects on the educated and the owners of the fixed factor may go in either direction. Tax competition is especially fierce if the governments care about the owners of the fixed factor. Elimination of their interests from the governments' objective functions results in a Pareto-improvement in a federation with tax competition.