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Income redistribution in a Federal system of governments

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  • Gordon, Roger H.
  • Cullen, Julie Berry

Abstract

Though the traditional literature in fiscal federalism argues that the Federal government should have primary responsibility for income redistribution, U.S. states are in fact actively engaged in redistribution. This paper develops a positive model of the respective roles of state and Federal governments that can rationalize this observation. Redistribution by states creates positive horizontal fiscal externalities to other states due to migration, but negative vertical fiscal externalities to the national government due to changes in reported taxable income. We forecast that states will engage in at least some redistribution, though to a lesser degree the greater are mobility relative to taxable income elasticities. The Federal government can then choose the degree of Federal redistribution to assure that the net externalities are zero. Given such policies, we then estimate the welfare weights and migration elasticities for different income groups that would generate the effective net tax schedules observed in the U.S. The parameter estimates are broadly plausible, suggesting that the model can help explain the division of responsibilities for redistribution between state and Federal governments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 96 (2012)
Issue (Month): 11 ()
Pages: 1100-1109

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Handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:1100-1109

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Fiscal federalism; Income redistribution; Fiscal externalities;

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References

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Cited by:
  1. Craig Brett & John Weymark, 2008. "Strategic Nonlinear Income Tax Competition with Perfect Labor Mobility," Vanderbilt University Department of Economics Working Papers 0812, Vanderbilt University Department of Economics.
  2. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, IEF, vol. 200(1), pages 15-39, March.
  3. Diego Martínez, 2014. "Vertical externalities revisited: new results with public inputs and unit taxation," Working Papers, Universidade de Vigo, GEN - Governance and Economics research Network 1403, Universidade de Vigo, GEN - Governance and Economics research Network.

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