37 Pages Posted: 18 Jun 2019 Last revised: 28 Sep 2019
Date Written: July 1, 2019
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: Suggested Citation