Working Paper: NBER ID: w25099
Authors: Stephen Calabrese; Dennis Epple; Richard Romano
Abstract: We provide a model with a federal government and multiple local governments, the former with power to levy an income tax for redistribution, and the latter choosing a local income tax, property tax, lump-sum tax or subsidy, and a local public good. Policy is set by majority choice at each tier of government by households that differ by income and ability to move across communities. We provide sufficient conditions for existence of equilibrium and examine its properties. Central findings are federal income distribution, little local redistribution, and local preference for property taxation over income taxation to fund local public goods.
Keywords: Taxation; Redistribution; Federalism; Public Goods
JEL Codes: H2; H7; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal income taxation (H20) | Local redistribution (D39) |
| Federal income taxation (H20) | Local taxation instruments (H71) |
| Household sorting based on preferences for local public goods (H73) | Localities do not engage in redistribution (H73) |
| Household sorting (D10) | Income stratification (D31) |
| Local taxation (H71) | Exacerbation of existing tax distortions (H31) |