Institute Working Paper 3

Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

Mark Colas | Visiting Scholar, Opportunity & Inclusive Growth Institute and University of Oregon
Kevin Hutchinson | eBay Inc.

Published November 14, 2017

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.

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

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