Comment on “The impact of the tax cut and jobs act on the spatial distribution of high productivity households and economic welfare”, by Daniele Coen-Pirani and Holger Sieg

Abstract

As part of the Tax Cut and Jobs Act (TCJA) of 2017, a $10,000 cap on state and local tax deductions (SALT) was imposed for federal tax returns. The authors first show that this increased the relative tax burden of the highest earners in high tax states by 3%. Motivated by this fact, the authors develop a spatial equilibrium model where individuals choose to live in “superstar” cities, which offer higher chances of becoming a highly productive worker but have higher taxes, or ordinary cities, where it is less likely to become a high type worker but taxes are lower. In their model, one’s income profile is determined when young. Therefore, there is an incentive to live in the superstar city when young, to increase the chance of becoming a high type. After one's income profile is fixed, the high types have an incentive to move to the ordinary city due to the tax differentials. They calibrate this model to understand the effects of the SALT deduction cap as part of the TCJA. The results depend on the extent of the endogeneity of the productivity advantage in the superstar city.