Optimal Income Taxation: An Urban Economics Perspective

Mark Huggett and Wenlan Luo

Review of Economic Dynamics, 2023, vol. 51, 847-866

Abstract: We derive an optimal labor income tax rate formula for urban models that nests the Mirrlees model as a limiting case. Optimal tax rates are determined by traditional forces plus a new term arising from urban forces: house price, migration and agglomeration effects. Based on the earnings distribution, housing costs and housing tenure in large and small US cities, we find that in a benchmark model (i) the optimal income tax rate schedule is U-shaped, (ii) urban forces raise the optimal tax rate schedule at all income levels and (iii) adopting an optimal tax system induces agents with low skill levels to leave large, productive cities. (Copyright: Elsevier)

Keywords: Urban economics; Optimal taxation; Income inequality; Housing (search for similar items in EconPapers)
JEL-codes: H2 J1 R2 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.red.2023.08.006

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