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Fiscal Policies in Open Cities with Firms and Households

  • Andrew Haughwout
  • Robert P. Inman

With the renewed interest in cities as economic centers comes a need to understand how local public services and local taxes are likely to affect city economic performance. This paper provides an equilibrium model of an open city economy with mobile firms and resident workers. Given household preferences and firm technologies and an exogenous configuration of city tax rates and national grants and fiscal mandates, the model calculates equilibrium values for firm production and input use, household consumption and housing choices, city wages, rents, and population, and finally, local tax bases, revenues, and public goods provision. The model is calibrated to the Philadelphia economy for FY 1998; model predictions are compared to recent econometric estimates of the effects of city fiscal policy on the Philadelphia private economy. We then explore two important questions for the city's fiscal future: What are the economic and fiscal consequences of raising city tax rates? Can the city shoulder a rising burden of local welfare payments and remain a viable economic center in the long-run? We find the city to be near the top of its total revenue hill and incapable of bearing significant increases in local responsibility for welfare transfers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7823.

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Date of creation: Aug 2000
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Publication status: published as Haughwout, Andrew and Robert P. Inman. "Fiscal Policies In Open Cities With Firms And Households," Regional Science and Urban Economics, 2001, v31(2-3,Apr), 147-180.
Handle: RePEc:nbr:nberwo:7823
Note: PE
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  1. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
  2. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
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  4. Haughwout, Andrew F., 2002. "Public infrastructure investments, productivity and welfare in fixed geographic areas," Journal of Public Economics, Elsevier, vol. 83(3), pages 405-428, March.
  5. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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  9. Richard Arnott & James G. MacKinnon, 1976. "The Effects of the Property Tax: A General Equilibrium Simulation," Working Papers 205, Queen's University, Department of Economics.
  10. Mintz, J. & Tulkens, H., 1984. "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers 1984027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  12. Inman, Robert P., 1989. "The local decision to tax : Evidence from large U.S. Cities," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 455-491, August.
  13. Mieszkowski, Peter, 1972. "The property tax: An excise tax or a profits tax?," Journal of Public Economics, Elsevier, vol. 1(1), pages 73-96, April.
  14. Sullivan, Arthur M., 1985. "The general-equilibrium effects of the residential property tax: Incidence and excess burden," Journal of Urban Economics, Elsevier, vol. 18(2), pages 235-250, September.
  15. Brueckner, Jan K., 1981. "Labor mobility and the incidence of the residential property tax," Journal of Urban Economics, Elsevier, vol. 10(2), pages 173-182, September.
  16. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
  17. Polinsky, A. Mitchell & Rubinfeld, Daniel L., 1978. "The long-run effects of a residential property tax and local public services," Journal of Urban Economics, Elsevier, vol. 5(2), pages 241-262, April.
  18. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  19. Pasha Hafiz A. & Ghaus A. F. Aisha, 1995. "General Equilibrium Effects of Local Taxes," Journal of Urban Economics, Elsevier, vol. 38(3), pages 253-271, November.
  20. Duncan Black & Vernon Henderson, 1999. "A Theory of Urban Growth," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 252-284, April.
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