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The Efficiency of State Taxes on Mobile Labour Income
Author(s) -
PETCHEY JEFFREY,
SHAPIRO PERRY
Publication year - 2000
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2000.tb00024.x
Subject(s) - inefficiency , wage , economics , competition (biology) , labour economics , state (computer science) , income tax , public economics , market economy , ecology , algorithm , computer science , biology
We model a federation where States levy a tax on the wage income of mobile citizens who shop between States for their preferred tax and public policy package. It is shown that competition between States results in efficient State spending but that the taxes on wage income are inefficient in the sense that mobile taxpayers are allocated inefficiently across States. The implication is that if States tax the wage income of mobile workers, there may be benefits from policy competition (a more competitive federal system) but also costs associated with the inefficiency. The central government can correct for the inefficiency, but this requires a complex system of inter‐State transfers that are difficult to implement in practice.