Citation

Discussion Paper Details

Please find the details for DP10352 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Optimal Spatial Taxation: Are Big Cities too Small?

Author(s): Jan Eeckhout and Nezih Guner

Publication Date: January 2015

Keyword(s): city size, general equilibrium, misallocation, population mobility and taxation

Programme Area(s): International Macroeconomics and Public Economics

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 depends on the level of government spending and on the concentration of housing wealth. Our estimates for the US implies 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%.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10352

Bibliographic Reference

Eeckhout, J and Guner, N. 2015. 'Optimal Spatial Taxation: Are Big Cities too Small?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10352