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

Kevin Milligan and Michael Smart

American Economic Journal: Economic Policy, 2019, vol. 11, issue 1, 406-34

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.

JEL-codes: D31 H21 H23 H24 H26 H71 H77 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/pol.20160600
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/pol.20160600 (application/pdf)
https://www.aeaweb.org/content/file?id=8895 (application/zip)
https://www.aeaweb.org/articles/attachments?retrie ... NkG6tZCSomXtJFHquXQ6 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejpol:v:11:y:2019:i:1:p:406-34

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Economic Policy is currently edited by Matthew Shapiro

More articles in American Economic Journal: Economic Policy from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().