Policy Research

Optimal Spatial Taxation: Are Big Cities Too Small?

Jan Eeckhout, Nezih Guner

Summary

The article attempts to formulate the method of income taxation that results in the highest efficiency and welfare gains. Through a thorough general equilibrium analysis the study finds that the most efficient tax system taxes individual cities incomes at different rates. The article continues to advocate for a tax adjustment to be a factor of government expenditures and the concentration of housing wealth. It also explores the fact that when facing identical income tax brackets people living in larger cities tend to get taxed higher marginal tax rates because being in larger cities creates increased income and pushes them into higher tax brackets. For this reason the study declares the current income tax schedule is too progressive.

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Policy Implications

This article can be used in designing policy related to income tax schedules, not just at the federal level but at state or even local. The changes suggested in this study would involve large overhauls of the current system, but smaller components like taxing more when housing wealth is higher could be employed more easily.