Working Paper: NBER ID: w2921
Authors: Robert P. Inman
Abstract: The structure of local taxation is an important determinant of the fiscal performance of decentralized public economies. In contrast to our understanding of local government spending, however, we know surprisingly little about how cities and states set taxes. This study specifies and estimates a model of the institutional, political, and economic determinants of the local decision to tax. Redistributive politics is an important determinant of local tax policy, at least for this sample of 41 large U.S. cities during the period 1961-1986. The results cast serious doubt on the validity of the "representative" or average taxpayer approach to behavioral modeling of fiscal policy for large, income diverse governments. The results allow us to predict the effects on local financing of removing federal tax deductibility of local taxes, an issue of current importance in the United States.
Keywords: local taxation; public finance; redistributive politics; federal tax policy
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 |
|---|---|
| redistributive politics (H23) | local tax policy (H71) |
| mayor's preferences over tax distribution (H29) | local tax policy (H71) |
| removal of federal tax deductibility (H20) | local revenues (H71) |
| local revenues (H71) | local spending (H72) |
| removal of federal tax deductibility (H20) | federal tax receipts (H29) |
| local tax rates (H71) | provision of public goods (H42) |
| local tax rates (H71) | tax base (H20) |
| tax base (H20) | local revenues (H71) |