Skip to main content
Review logo

Our most academic publication offers research and surveys on monetary policy, national and international developments, banking, and more. The content is written for an economically informed readership—from the undergraduate student to the PhD.

Vol. 99, No. 4 (Posted 2017-10-04)

Fiscal Federalism and Optimal Income Taxes

by Maximiliano Dvorkin

This paper studies how local policies—specifically, taxes on income with redistributive goals—affect the migration decisions of individuals and, in turn, how these migration decisions affect local and economy-wide tax and redistribution policies. The author develops a model of optimal taxation for a federal system of governments in the tradition of Mirrlees (1971), where taxes can be fully nonlinear but informational asymmetries prevent the equalization of well being across workers due to informational rents. This article extends the large literature on federalism and tax competition by obtaining optimal tax formulas for the federal and state governments. The literature has mainly focused on inefficiencies that arise due to fiscal externalities when governments have access to restricted instruments (for example, allowing only linear taxes). Contrary to previous results in that literature, the author shows here that state governments will provide redistribution through taxes and that, in a symmetric equilibrium, the overall tax schedule that combines the actions of both the federal and state governments is the same as that of a unitary government. This implies that, under the conditions analyzed in the model, there is no reason to restrict income redistribution objectives to the federal government only, as commonly prescribed in the literature.

Full Article PDF

https://doi.org/10.20955/r.2017.319-336

Cite this article





Subscribe to our newsletter


Follow us

Twitter logo Google Plus logo Facebook logo YouTube logo LinkedIn logo
Back to Top