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Title: Income Tax Reform in a Spatial Equilibrium

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: Progressive income taxes provide a disincentive for workers to live in high productivity local labor markets, potentially leading to a misallocation of resources across space. Under certain conditions on preferences, the optimal income tax is flat when there is only one type of worker. However, once the model is extended to include high and low-skill workers, we show that there are cases when the low-skill worker can actually be made worse off by moving from a progressive income tax to a flat tax. To quantitatively evaluate the merits of implementing a flat tax, we augment the empirical spatial equilibrium model in Diamond (2015) to incorporate federal income taxes and estimate it using Census data. Counterfactual simulations show that moving from the current tax schedule to a flat tax would increase the welfare of high-skill workers by 4.2%, while decreasing the welfare of low-skill workers by 3.8%. Our results provide a rationale for progressive taxes in assisting low-skill workers, even without redistribution.

Url: https://www.sole-jole.org/16469.pdf

User Submitted?: No

Authors: Hutchinson, Kevin; Colas, Mark

Publisher: University of Wisconsin-Madison

Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure, Other

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