American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates
American Economic Journal: Economic Policy
vol. 11,
no. 1, February 2019
(pp. 406–34)
Abstract
We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism.Citation
Milligan, Kevin, and Michael Smart. 2019. "An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates." American Economic Journal: Economic Policy, 11 (1): 406–34. DOI: 10.1257/pol.20160600Additional Materials
JEL Classification
- D31 Personal Income, Wealth, and Their Distributions
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H26 Tax Evasion and Avoidance
- H71 State and Local Taxation, Subsidies, and Revenue
- H77 Intergovernmental Relations; Federalism; Secession
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