Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

Abstract

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

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