Marginal Costs of Income Redistribution at the State Level

Abstract

Previous analyses of the cost of redistribution by a unitary government have focussed on the welfare losses of distorted labor supply choices. On the other hand, the analysis of redistribution b,y local qovernments in a federal system has emphasized the effect of the migration of taxpayers and transfer recipients in raising the cost (faced by state residents) of engaging in more redistribution. This paper combines both migration and labor supply effects to compute marginal redistribution costs at the state and federal level. Surprisingly, for a wide range of parameter values, states face lower redistribution costs than the national government because they are able to "export" some of the cost through lower federal tax revenue. The normative implication of the analysis is that any case for national redistribution policies must be based on benefit spillovers across state lines rather than on tax competition among state governments.