A re-examination of the use of ability to pay taxes by local governments

Abstract

The orthodox view of local finance in the U.S. is that local governments should abstain from using ability to pay taxes because migration would result in a misallocation of resources and would nullify any attempt to redistribute income. This paper uses a general equilibrium model of a metropolitan area to examine the efficiency and redistributive properties of local income taxation relative to local head taxes. Contrary to the orthodox assertion, the results indicate that local governments can use income taxation without substantially misallocating resources. In addition, some redistribution results from the use of local income taxes.