Reexamination of the Use of Ability-to-Pay Taxes by Local Governments

摘要

Examines the orthodox argument that governments should not use ability-to-pay taxes such as the local income tax. An applied general equilibrium model is used to quantify the efficiency and equity aspects of the argument. The local income tax is found to cause a nonoptimal allocation of people to communities, but the welfare loss is found to be small for benchmark parameter values. The results chiefly from the small budget share of the local public good relative to housing. That is, even if local governments increase their expenditures to 10 percent of an individual's budget, the welfare loss will tend to remain small as long as people continue to spend 25% to 35% of their income on housing. The results suggest that local governments can use ability-to-pay taxes that result in some redistribution without serious efficiency consequences.