An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates

Kevin Milligan and Michael Smart

No 7043, CESifo Working Paper Series from CESifo

Abstract: We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly-chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism.

Keywords: taxation; redistribution; fiscal federalism (search for similar items in EconPapers)
JEL-codes: H20 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-pbe and nep-ure
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Journal Article: An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7043

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