Working Paper

Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

Abstract: This paper studies the incidence and efficiency of a progressive income tax in a spatial equilibrium. We use US census data to estimate an empirical spatial equilibrium with heterogeneous workers, landowners, and firms. The US income tax shifts skilled workers out of high-productivity cities, leading to a deadweight loss of 2% of tax revenue. Flattening the tax schedule significantly increases welfare inequality between skilled and unskilled workers and does not increase overall worker welfare, as the efficiency gains are captured by landowners. This suggests that progressive income taxes reduce welfare inequality without reducing total worker welfare.

Keywords: Tax incidence; Worker heterogeneity; Local labor markets;

JEL Classification: H22; J31; R13;

https://doi.org/10.21034/iwp.3

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Opportunity and Inclusive Growth Institute Working Papers

Publication Date: 2017-11-14

Number: 3

Pages: 59 pages