This project studies the theoretical and empirical analysis of the relation between qualification structure and fiscal competition. The existing literature will be elaborated by examining labour with differing skills (high/low) as well as capital as factors of production. Questions to be addressed include: How does fiscal competition distort the composition of public spending? For instance, if skilled labour is mobile while unskilled labour is not, communities will provide too many public goods benefitting skilled labour. Another topic of note is the structure of taxation, since capital taxes are bourne not only by capital owners but also by the suppliers of complementary factors, e.g. skilled labour. The results of the theoretical research are to be tested using data on community expenditures.