34 Pages Posted: 18 Jun 2019 Last revised: 29 Jul 2019
Date Written: July 2019
We propose a model in which cultural diversity generates social conflict through negative consumption externalities. These externalities can be mitigated by a government which transforms private consumption into public good consumption. We show that in such a framework, 'diversity taxes' arise as a policy tool to regulate the externalities from the private consumption of diverse groups. We link the size of such taxes to characteristics of the underlying distribution of cultural groups as well as to the type of government (utilitarian, majority, minority). Testing the predictions from our theoretical analysis on U.S. city and county data from 1990, we find strong evidence for the existence of sizeable 'diversity taxes' in U.S. localities. We further document statistically significant relationships between characteristics of the group size distribution and local taxes per capita which are in line with our hypothesized link between cultural diversity, negative externalities, and taxation.
Keywords: cultural diversity, externalities, taxation, public good provision
JEL Classification: D62, H21, Z18
Suggested Citation: Suggested Citation