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

32 Pages Posted: 18 Jul 2018

See all articles by Kevin S. Milligan

Kevin S. Milligan

University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 18, 2018

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.

Keywords: taxation, redistribution, fiscal federalism

JEL Classification: H200

Suggested Citation

Milligan, Kevin S. and Smart, Michael, An Estimable Model of Income Redistribution in a Federation: Musgrave Meets Oates (May 18, 2018). CESifo Working Paper Series No. 7043, Available at SSRN: https://ssrn.com/abstract=3208059

Kevin S. Milligan

University of British Columbia (UBC) - Department of Economics ( email )

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Canada

National Bureau of Economic Research (NBER)

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Michael Smart (Contact Author)

University of Toronto - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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