University of Michigan Gateway Ford School

The Unequal Geographic Burden of Federal Taxation

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February 2009

David Albouy

Abstract

In the United States, workers in cities offering above-average nominal wages—cities with high productivity, low quality-of-life, or inefficient housing sectors—pay 30 percent more in federal taxes than otherwise identical workers in cities offering below-average wages. According to simulation results, federal taxes lower long-run employment levels in high-wage areas by 15 percent and land and housing prices by 25 and 4 percent, leading to locational inefficiencies costing 0.28 percent of income, or $34 billion in 2005. Indexing taxes to local wage-levels eliminates these locational inefficiencies. Tax deductions index taxes partially to local cost-ofliving and improve locational efficiency.

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Keywords: Public Finance & Taxation

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