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A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures

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  • Roger H. Gordon
  • Joel Slemrod

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1080.

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Date of creation: Feb 1983
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Publication status: 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.
Handle: RePEc:nbr:nberwo:1080

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References

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  1. Hamilton, Bruce W, 1976. "Capitalization of Intrajurisdictional Differences in Local Tax Prices," American Economic Review, American Economic Association, vol. 66(5), pages 743-53, December.
  2. McGuire, Martin, 1974. "Group Segregation and Optimal Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 112-32, Jan.-Feb..
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Cited by:
  1. Joel Slemrod, 1984. "A General Equilibrium Model of Taxation That Uses Micro-Unit Data: Withan Application to the Impact of Instituting a Flat-Rate Income Tax," NBER Working Papers 1461, National Bureau of Economic Research, Inc.
  2. Fortune, Peter, 1998. "Tax-exempt Bonds Really Do Subsidize Municipal Capital!," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 43-54, March.
  3. Roger H. Gordon & Joel Slemrod, 1985. "An Empirical Examination of Municipal Financial Policy," NBER Working Papers 1599, National Bureau of Economic Research, Inc.
  4. James M. Poterba, 1984. "Expected Future Tax Policy and Tax Exempt Bond Yields," Working papers 350, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Joel Slemrod, 1985. "The Impact of Tax Reform on Households," NBER Working Papers 1765, National Bureau of Economic Research, Inc.
  6. James M. Poterba & Arturo Ramirez Verdugo, 2008. "Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax," NBER Working Papers 14439, National Bureau of Economic Research, Inc.
  7. Poterba, James M. & Verdugo, Arturo Ramírez, 2011. "Portfolio Substitution And The Revenue Cost Of The Federal Income Tax Exemption For State And Local Government Bonds," National Tax Journal, National Tax Association, vol. 64(2), pages 591-613, June.
  8. Don Fullerton & Gilbert E. Metcalf, 2002. "Tax Incidence," NBER Working Papers 8829, National Bureau of Economic Research, Inc.
    • Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
  9. Berkovec, James & Fullerton, Don, 1989. "The General Equilibrium Effects of Inflation on Housing Consumption and Investment," American Economic Review, American Economic Association, vol. 79(2), pages 277-82, May.
  10. Charles R. Hulten & Robert M. Schwab, 1987. "Income Originating in the State and Local Sector," NBER Working Papers 2314, National Bureau of Economic Research, Inc.
  11. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc.
  12. Berkovec, James & Fullerton, Don, 1992. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 390-429, April.

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