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The Impact of the Tax Cut and Jobs Act on the Spatial Distribution of High Productivity Households and Economic Welfare

Author

Listed:
  • Daniele Coen-Pirani

    (University of Pittsburgh)

  • Holger Sieg

    (University of Pennsylvania)

Abstract

The Tax Cut and Jobs Act of 2017 capped state and local tax deductions allowing tax filers to claim only up to $10,000 on their federal tax return. We show that this new cap primarily affects households in the top percentile of the income distribution residing in high-tax, high-cost cities. We develop and calibrate a new dynamic spatial equilibrium model to evaluate the impact of this policy change on the distribution of economic activity and aggregate welfare. Young households move to cities with high agglomeration externalities to acquire human capital. These cities tend to levy high local taxes and have a high cost of living. As households grow older the human capital benefits become less relevant. Hence, households face strong financial incentives to move to low-tax, low-cost cities. The tax reform reinforces these financial incentives leading to a relocation of high-productivity households to low-cost cities. If local agglomeration effects are endogenous and depend significantly on these high-productivity households, the tax reform may generate substantial negative effects on aggregate income.

Suggested Citation

  • Daniele Coen-Pirani & Holger Sieg, 2019. "The Impact of the Tax Cut and Jobs Act on the Spatial Distribution of High Productivity Households and Economic Welfare," 2019 Meeting Papers 860, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:860
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    Cited by:

    1. Holger Sieg & Chamna Yoon & Jipeng Zhang, 2020. "The Impact of Migration Controls on Urban Fiscal Policies and the Intergenerational Transmission of Human Capital in China," NBER Working Papers 27764, National Bureau of Economic Research, Inc.
    2. Holger Sieg & Chamna Yoon & Jipeng Zhang, 2023. "The Impact Of Local Fiscal And Migration Policies On Human Capital Accumulation And Inequality In China," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 57-93, February.

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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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