Heterogeneous workers and Federal income taxes in a spatial equilibrium Mark Colas, Kevin Hutchinson
By: Colas, Mark
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Contributor(s): Hutchinson, Kevin.
Material type: 
ArticlePublisher: 2021Subject(s): RENTA | IMPUESTOS | INCIDENCIA Y TRASLACION | EFICACIA | TRABAJADORES | ESTADOS UNIDOS | MODELOS ECONOMETRICOS
In:
American Economic Journal : Economic Policy v. 13, n. 2, May 2021, p. 100-134Summary: 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.
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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.
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