NCPA - National Center for Policy Analysis


January 8, 2009

In the United States, workers in cities offering above-average nominal wages pay 30 percent more in federal taxes than otherwise identical workers in cities offering below-average wages, according to researcher David Albouy.  He estimates that federal taxes:

  • Lower long-run employment levels in high-wage areas by 15 percent.
  • Depress land prices there by 25 percent.
  • Reduce housing prices in the area by 4 percent.

Economists term these negative outcomes "locational inefficiencies," and Albouy estimates that they cost taxpayers $34 billion in 2005.  Consider:

  • In the United States, highly taxed areas tend to be in large cities inside of populous states; their higher tax burdens may be a reflection of their relatively low Senate representation and later Presidential primaries.
  • The taxpayers in these highly taxed states often claim larger deductions than their counterparts in states with lower federal taxes.
  • These deductions may help workers offset location inefficiency, but their effect is not strong enough to offset the consumption inefficiencies caused by higher nominal incomes and correspondingly higher taxes.
  • Locational efficiency is easier to achieve by indexing taxes for local inflation than by providing deductions.

The President's Advisory Panel has recommended setting mortgage deduction caps according to local prices; but such a measure would be difficult to implement.  In addition, allowing the mortgage deduction limit to vary by place would do little to help those who do not itemize their deductions. 

Source: Lester Picker, "The Unequal Geographic Burden of Federal Taxation," NBER Digest, November 2008; based upon: David Albouy, "The Unequal Geographic Burden of Federal Taxation," National Bureau of Economic Research, Working Paper 13995, May 2008.

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