An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates
"An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates," with Michael Smart.
American Economic Journal: Economic Policy, Vol. 11, No. 1 (2019), pp. 406-434. DOI
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.
Versions:
Published version (February 2019)
Final Draft Data and Programs (June 2018)