Working Paper: NBER ID: w1080
Authors: 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.
Keywords: subsidies; municipal expenditures; tax policy; general equilibrium
JEL Codes: H71; H72; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| eliminating income tax deductibility of local taxes (H71) | raise utility of all income groups (H49) |
| eliminating income tax deductibility of local taxes (H71) | benefit homeowners and renters (R21) |
| eliminating income tax deductibility of local taxes (H71) | hurt very poor (I32) |
| eliminating income tax deductibility of local taxes (H71) | raise tax burdens on homeowners, especially wealthy (H22) |
| making interest on municipal bonds taxable (H74) | adversely affect wealthy (G51) |
| making interest on municipal bonds taxable (H74) | potentially increase costs for lower-income groups (H53) |
| eliminating income tax deductibility of local taxes (H71) | total equivalent increase in current consumption across groups of 0.94% (D12) |
| making municipal bond interest taxable (H74) | total equivalent increase in current consumption across groups of 0.13% (F62) |