Local Redistribution Financed by Income Tax

Abstract

In this article, a positive model of local income redistribution financed by income tax is developed. The tax rate and the level of redistribution within a community are determined through majority voting. The amount of redistribution that each local government can undertake is constrained by housing market distortions and by the ability of people to freely move from one jurisdiction to another. The author establishes a number of equilibrium conditions with a general form of the utility function. The three different sets of numerically computed equilibria are developed. The first set of computational equilibria is developed assuming voters are less sophisticated. These results are compared with the results of the property tax-financed redistribution-computed equilibria in Epple and Romer’s study. The second set of computational equilibria are developed assuming voters are highly sophisticated. The third set are developed assuming that land rents are equally divided among the entire population.