Working Paper: NBER ID: w7823
Authors: Andrew Haughwout; Robert P. Inman
Abstract: 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.
Keywords: No keywords provided
JEL Codes: H3; H7; R5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Raising city tax rates (H79) | Adverse economic consequences (F69) |
| Higher tax rates (H29) | Reduce attractiveness of the city for firms and residents (R38) |
| Reduce attractiveness of the city for firms and residents (R38) | Declines in capital investment and population (R23) |
| Increased local welfare responsibilities (I39) | Detract from the city's overall economic health (R11) |
| Raising city tax rates (H79) | Decrease in local economic performance (F69) |