Local Revenue Hills: Evidence from Four U.S. Cities.” NBER working paper no. 9686

Abstract—We provide estimates of the effects and long-run elasticities of the tax base with respect to tax rates for four large U.S. cities: Houston (property taxation), Minneapolis (property taxation), New York City (property, general sales, and income taxation), and Philadelphia (property, gross receipts, and wage taxation). Results suggest that three of our cities are near the peaks of their revenue hills; Minneapolis is the exception. A signi cant negative effect of a balanced-budget increase in city property tax rates on the city property base is interpreted as a capitalization effect and suggests that marginal increases in city spending do not provide positive net bene ts to property owners. Estimates of the effects of taxes on city employment levels for New York City and Philadelphia—the two cities for which employment series are available—show the local income and wage tax rates have signi cant negative effects on city employment levels. Cuts in these tax rates are likely to be an economically cost-effective way to increase city jobs. High taxes, sometimes by diminishing consumption of the taxed commodities, and sometimes by encouraging smuggling, frequently afford a smaller revenue to government than what might be drawn from more moderate taxes. (Adam Smith, The Wealth of Nations, book V, chapter II.) It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess... If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are con ned within proper and moderate bounds. (Alexander Hamilton, “Further Defects of the Present Constitution, ” Feder-alist Papers, No. 21.) If a tax is gradually increased from zero up to the point where it becomes prohibitive, its yield is at rst nil, then increase by small stages until it reaches a maximum, after which it gradually declines until it becomes zero again. [Jules Dupuit, “On the Measurement of Utility from Public Works, ” reprinted in K. Arrow and Tibor Sci