Fiscal Policies in Open Cities with Firms and Households

53 Pages Posted: 3 Aug 2000 Last revised: 19 May 2021

See all articles by Andrew Haughwout

Andrew Haughwout

Federal Reserve Bank of New York

Robert P. Inman

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: August 2000

Abstract

With the renewed interest in cities as economic centers comes a need to understand how local public services and local taxes are likely to affect city economic performance. This paper provides an equilibrium model of an open city economy with mobile firms and resident workers. Given household preferences and firm technologies and an exogenous configuration of city tax rates and national grants and fiscal mandates, the model calculates equilibrium values for firm production and input use, household consumption and housing choices, city wages, rents, and population, and finally, local tax bases, revenues, and public goods provision. The model is calibrated to the Philadelphia economy for FY 1998; model predictions are compared to recent econometric estimates of the effects of city fiscal policy on the Philadelphia private economy. We then explore two important questions for the city's fiscal future: What are the economic and fiscal consequences of raising city tax rates? Can the city shoulder a rising burden of local welfare payments and remain a viable economic center in the long-run? We find the city to be near the top of its total revenue hill and incapable of bearing significant increases in local responsibility for welfare transfers.

Suggested Citation

Haughwout, Andrew F. and Inman, Robert P., Fiscal Policies in Open Cities with Firms and Households (August 2000). NBER Working Paper No. w7823, Available at SSRN: https://ssrn.com/abstract=238146

Andrew F. Haughwout

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
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Robert P. Inman (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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United States
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215-898-8200 (Fax)

National Bureau of Economic Research (NBER)

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