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An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates

Author

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  • Milligan Kevin
  • Michael Smart

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.

Suggested Citation

  • Milligan Kevin & Michael Smart, 2018. "An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates," CESifo Working Paper Series 7043, CESifo.
    • Handle: RePEc:ces:ceswps:_7043
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp7043.pdf
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    Cited by:

    1. Colas, Mark & Saulnier, Emmett, 2023. "Vertical migration externalities," Regional Science and Urban Economics, Elsevier, vol. 101(C).
    2. Martinez, Isabel Z., 2016. "Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland," VfS Annual Conference 2016 (Augsburg): Demographic Change 145643, Verein für Socialpolitik / German Economic Association.
    3. Kenneth McKenzie, 2019. "Altering the Tax Mix in Alberta," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 12(25), September.
    4. Rubolino, Enrico, 2019. "The efficiency and distributive effects of local taxes: evidence from Italian municipalities," ISER Working Paper Series 2019-02, Institute for Social and Economic Research.
    5. Federico Revelli & Tsung-Sheng Tsai & Roberto Zotti, 2021. "Fiscal Externalities in Multilevel Tax Structures: Evidence from Concurrent Income Taxation," CESifo Working Paper Series 9276, CESifo.
    6. David R. Agrawal & Kenneth Tester, 2024. "State Taxation of Nonresident Income and the Location of Work," American Economic Journal: Economic Policy, American Economic Association, vol. 16(1), pages 447-481, February.
    7. Enrico Rubolino & Tommaso Giommoni, 2023. "Taxation and Mobility: Evidence from Tax Decentralization in Italy," CESifo Working Paper Series 10655, CESifo.
    8. David R. Agrawal & Dirk Foremny, 2019. "Relocation of the Rich: Migration in Response to Top Tax Rate Changes from Spanish Reforms," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 214-232, May.
    9. Martínez, Isabel Z., 2022. "Mobility responses to the establishment of a residential tax haven: Evidence from Switzerland," Journal of Urban Economics, Elsevier, vol. 129(C).

    More about this item

    Keywords

    taxation; redistribution; fiscal federalism;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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