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Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

Author

Listed:
  • Mark Colas
  • Kevin Hutchinson

Abstract

This paper studies the incidence and efficiency of a progressive income tax in a spatial equilibrium. We use US census data to estimate an empirical spatial equilibrium with heterogeneous workers, landowners, and firms. The US income tax shifts skilled workers out of high-productivity cities, leading to a deadweight loss of 2% of tax revenue. Flattening the tax schedule significantly increases welfare inequality between skilled and unskilled workers and does not increase overall worker welfare, as the efficiency gains are captured by landowners. This suggests that progressive income taxes reduce welfare inequality without reducing total worker welfare.

Suggested Citation

  • Mark Colas & Kevin Hutchinson, 2017. "Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium," Opportunity and Inclusive Growth Institute Working Papers 3, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmoi:0003
    DOI: 10.21034/iwp.3
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    Cited by:

    1. 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.
    2. 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.

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    More about this item

    Keywords

    Tax incidence; Worker heterogeneity; Local labor markets;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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