Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107574
Authors: 
Eeckhout, Jan
Guner, Nezih
Year of Publication: 
2015
Series/Report no.: 
IZA Discussion Papers 8781
Abstract: 
We analyze the role of optimal income taxation across different local labor markets. Should labor in large cities be taxed differently than in small cities? We find that a planner who needs to raise revenue and is constrained by free mobility of labor across cities does not choose equal taxes for cities of different sizes. The optimal tax schedule is location specific and tax differences between large and small cities depend on the level of government spending and on the concentration of housing wealth. Our estimates for the US imply higher marginal rates in big cities, but lower than what is observed. Simulating the US economy under the optimal tax schedule, there are large effects on population mobility: the fraction of population in the 5 largest cities grows by 8.0% with 3.5% of the country-wide population moving to bigger cities. The welfare gains however are smaller. Aggregate consumption goes up by 1.53%. This is due to the fact that much of the output gains are spent on the increased costs of housing construction in bigger cities. Aggregate housing consumption goes down by 1.75%.
Subjects: 
misallocation
taxation
population mobility
city size
general equilibrium
JEL: 
H21
J61
R12
R13
Document Type: 
Working Paper

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