This paper studies the incidence and efficiency of a progressive income tax in a spatial equilibrium. We use US census data to estimate an empirical spatial equilibrium with heterogeneous workers, landowners, and firms. The US income tax shifts skilled workers out of high-productivity cities, leading to a deadweight loss of 2% of tax revenue. Flattening the tax schedule significantly increases welfare inequality between skilled and unskilled workers and does not increase overall worker welfare, as the efficiency gains are captured by landowners. This suggests that progressive income taxes reduce welfare inequality without reducing total worker welfare.JEL Classification: J31, H22, R13 Keywords: Tax incidence, worker heterogeneity, local labor markets. * A number of people have helped to improve this paper, but we especially wish to thank Chris Taber, John Kennan, and Jesse Gregory for their guidance throughout. We also greatly appreciate advice and suggestions from
This paper examines China's changing internal labor migration patterns between 1990 and 2005 as its household registration (hukou) system evolves. We document a drastic increase in the size of the migrant population, along with significant composition shifts in migrants' characteristics, and geographic and employment distributions. Recent migrants are on average older, more educated, more likely to be female, more likely to be married, and more likely to have an urban hukou. Regression analysis shows that migration rates increased substantially during this period for all individuals regardless of their education, gender, age, marital or hukou status. By employing a simple migration location choice model, we investigate the relationship between hukou policy and migration behavior. We find that larger and more developed cities are more attractive to migrants but tend to set more stringent hukou restrictions. Rural migrants are significantly more deterred by hukou restrictions relative to urban migrants. These findings suggest that institutional factors, such as the hukou system, are important for understanding the observed patterns in China's labor migration.
We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.
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