Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

Mark Colas and Kevin Hutchinson

American Economic Journal: Economic Policy, 2021, vol. 13, issue 2, 100-134

Abstract: We study the geographic incidence and efficiency of an income tax by estimating a spatial equilibrium model with heterogeneous workers. The US income tax shifts households out of high-productivity cities, leading to locational inefficiency of 0.25 percent of output. Removing spatial tax distortions increases inequality because more educated households are more mobile and own larger shares of land. Flattening the tax schedule, or introducing cost-of-living adjustments or local wage adjustments leads to efficiency gains but causes substantial increases in inequality. Differences in mobility and land ownership across skill groups create an equity-efficiency trade-off that is unique to spatial settings.

JEL-codes: D31 H22 H24 J24 J31 R23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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DOI: 10.1257/pol.20180529

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