The Efficiency of State Taxes on Mobile Labour Income |
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Authors: | JEFFREY PETCHEY PERRY SHAPIRO |
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Affiliation: | Fiscal Federalism Research Program, School of Economics and Finance, Curtin University of Technology, Perth, Western Australia;Department of Economics, University of California, Santa Barbara, USA |
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Abstract: | We model a federation where States levy a tax on the wage income of mobile citizens who shop between States for their preferred tax and public policy package. It is shown that competition between States results in efficient State spending but that the taxes on wage income are inefficient in the sense that mobile taxpayers are allocated inefficiently across States. The implication is that if States tax the wage income of mobile workers, there may be benefits from policy competition (a more competitive federal system) but also costs associated with the inefficiency. The central government can correct for the inefficiency, but this requires a complex system of inter-State transfers that are difficult to implement in practice. |
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