A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures

Roger Gordon and Joel Slemrod

No 1080, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the United States, local government expenditures are heavily subsidized through a variety of sources. This paper explores theoretically and then simulates empirically the effects of eliminating either of two federal subsidies encouraging local government expenditures: (1) income tax deductibility of local tax payments, and (2) the tax exempt status of interest on municipal bonds.We find that eliminating the deductibility of local taxes raises the utility of all income groups, and of home owners as well as of renters.Making interest on municipal bonds taxable, however, substantially hurts the very rich, who lose a tax shelter, and may hurt the very poor, who pay more for municipal services. While most people gain, the net gain is very small.

Date: 1983-02
Note: PE
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Published as Gordon, Roger H. and Joel Slemrod. "A General Equilibrium Simulation Studyof Subsidies to Municipal Exoenditures." The Journal of Finance, Vol. 38, No. 2, (May 1983), pp. 585-594.

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Journal Article: A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures (1983)
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