"Local Revenue Hills: A General Equilibrium Specification with Evidence from Four U.S. Cities".

• Position: Essay - Brief Article

Haughwout, Andrew; Inman, Robert; Craig, Steven; and Luce, Thomas

National Bureau of Economic Research's NBER Working Paper Series, March 2000.

Though the idea that increasing tax rates can actually lead to decreased total revenue collections is not new, it was given new prominence in the Reagan era when used as justification to cut taxes. This study attempts to determine the revenue hills (i.e., the point at which total tax revenues collected actually decreases as the tax rate rises) associated with major taxes for several major cities and also to determine at what point along the hill these cities' rates currently reside. Major cities are examined because they have diverse economic bases and won't be overly biased towards any particular factor. The study considered a number of variables in its examination of the size of local revenue hills (i.e., the size of the tax base). The first and most obvious is the tax rate itself--a high tax rate may drive out certain types of economic activity, thereby actually reducing the tax base. The study also considers a number of other more external variables such as the amount of grant funding received, welfare sp ending, the cost of local public goods, interest rates, and crime. The study also considered the effects of economic shocks that may...