THE UNEQUAL GEOGRAPHIC BURDEN OF FEDERAL TAXATION

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.

For text:

http://www.nber.org/digest/nov08/w13995.html 

For study:

http://papers.nber.org/papers/w13995

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