FEDERAL-INCOME-TAX AND ITS EFFECTS ON INTERCITY AND INTRACITY RESOURCE-ALLOCATION

This article discusses the distortive effect of the federal income tax on the efficiency of resource allocation within and between cities, T his distortion shifts production to the smaller and less productive ci ties from the larger and more productive cities. To eliminate these di stortive effects, a city-size deduction should be applied. The underly ing assumption is that cities differ from one another in labor product ivity Consequently, in equilibrium, the size, the nominal income, and the price of housing vary across cities. When a uniform income tax rat e is used for financing federal expenditure, the shadow price of housi ng exceeds the market price in the larger cities, indicating that the stock of housing is too small and the per-capita housing consumption i s too large. The opposite is true in small cities, where also, if hous ing and the LPG (local public good) are net substitutes, the provision of the LPG is excessive. The article also discusses the effects of fe deral corporate profit taxes, which are shown to discourage the supply of the LPG, and shows that a net land rent tax is not always a feasib le tax instrument capable of raising the predetermined tax revenue.