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Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

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  • Mark Colas
  • Kevin Hutchinson

Abstract

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.

Suggested Citation

  • Mark Colas & Kevin Hutchinson, 2021. "Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium," American Economic Journal: Economic Policy, American Economic Association, vol. 13(2), pages 100-134, May.
    • Handle: RePEc:aea:aejpol:v:13:y:2021:i:2:p:100-134
    DOI: 10.1257/pol.20180529
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    Cited by:

    1. Laurence Ales & Christopher Sleet, 2022. "Optimal Taxation of Income‐Generating Choice," Econometrica, Econometric Society, vol. 90(5), pages 2397-2436, September.
    2. Gordon Hanson & Dani Rodrik & Rohan Sandhu, 2025. "The US Place-Based Policy Supply Chain," NBER Chapters, in: The Economics of Place-Based Policies, National Bureau of Economic Research, Inc.
    3. Herkenhoff, Kyle F. & Ohanian, Lee E. & Prescott, Edward C., 2018. "Tarnishing the golden and empire states: Land-use restrictions and the U.S. economic slowdown," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 89-109.
    4. Mark Colas & John M. Morehouse, 2022. "The environmental cost of land‐use restrictions," Quantitative Economics, Econometric Society, vol. 13(1), pages 179-223, January.
    5. Mark Colas & Dominik Sachs, 2024. "The Indirect Fiscal Benefits of Low-Skilled Immigration," American Economic Journal: Economic Policy, American Economic Association, vol. 16(2), pages 515-550, May.
    6. Colas, Mark & Saulnier, Emmett, 2023. "Vertical migration externalities," Regional Science and Urban Economics, Elsevier, vol. 101(C).
    7. Coen-Pirani, Daniele & Sieg, Holger, 2019. "The impact of the Tax Cut and Jobs Act on the spatial distribution of high productivity households and economic welfare," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 44-71.
    8. Finlay, John & Williams, Trevor C., 2025. "Housing demand, inequality, and spatial sorting," Journal of International Economics, Elsevier, vol. 158(C).
    9. Mark Colas & Robert McDonough, 2025. "Social Transfers and Spatial Distortions," Journal of Labor Economics, University of Chicago Press, vol. 43(1), pages 161-201.
    10. Furbach, Nina, 2025. "Non-homothetic housing demand and geographic worker sorting," Working Paper Series 3018, European Central Bank.
    11. Coen-Pirani, Daniele, 2025. "Tax progressivity and mobility costs," Regional Science and Urban Economics, Elsevier, vol. 114(C).

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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