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The impact of the Tax Cut and Jobs Act on the spatial distribution of high productivity households and economic welfare

Daniele Coen-Pirani and Holger Sieg

Journal of Monetary Economics, 2019, vol. 105, issue C, 44-71

Abstract: The Tax Cut and Jobs Act of 2017 capped state and local tax deductions. We show that this new cap primarily affects households in the top percentile of the income distribution residing in high-tax, high-cost cities. We develop a new dynamic spatial equilibrium model to evaluate the impact of this policy change on the distribution of economic activity and aggregate welfare. We show that the tax reform is likely to lead to a relocation of older high-productivity households to low-cost cities. If local agglomeration externalities depend on these high-productivity households, the tax reform may substantially lower aggregate income.

Keywords: Tax policy; Dynamic spatial equilibrium; Agglomeration externalities; Local labor markets; Aggregate implications of tax policy (search for similar items in EconPapers)
JEL-codes: E60 H20 H71 J20 R20 (search for similar items in EconPapers)
Date: 2019
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Working Paper: The Impact of the Tax Cut and Jobs Act on the Spatial Distribution of High Productivity Households and Economic Welfare (2019)
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DOI: 10.1016/j.jmoneco.2019.04.001

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