Diversity Taxes

37 Pages Posted: 18 Jun 2019 Last revised: 28 Sep 2019

See all articles by Saumya Deojain

Saumya Deojain

Washington University in St. Louis - Department of Economics

David Lindequist

Washington University in St. Louis - Department of Economics

Date Written: July 1, 2019

Abstract

We study how social conflict generated through cultural diversity affects public policy. In our model, social conflict arises when diverse groups impose negative consumption externalities on each other. These externalities can be mitigated by a government which transforms cultural 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 cultural 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 (majority and minority). In contrast to much of the literature, our analysis predicts that more diverse communities have a bigger government size as measured by local taxes per capita. Using U.S. city and county data from 1990, we are able to verify this prediction. We find strong evidence for the existence of sizeable 'diversity taxes' in U.S. localities after controlling for a variety of socioeconomic and demographic indicators. 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

Deojain, Saumya and Lindequist, David, Diversity Taxes (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3401377 or http://dx.doi.org/10.2139/ssrn.3401377

Saumya Deojain (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

David Lindequist

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

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