The agglomeration effect has seen the rise of global cities, such as Paris and London, which have tended to suck in talent and capital not only from around the world but also within their own countries. While these cities are honeypots for many in the world, this attraction isn’t always welcomed by locals.
Research from Kellogg highlights how locals can turn against the influx of foreign talent into their communities. The paper explores whether strategies to encourage or discourage the influx are most effective for the long-term vibrancy of communities.
Addressing the challenges
The study suggests that neither taxing foreigners’ home purchases nor subsidizing them is an ideal approach. A better approach, the researchers argue, is to tax capital gains on property for all, and use this revenue to offset any harms caused by the influx of people.
They believe this produces a win-win outcome, unlike the current approach that tends to prevent an influx of talent and results in losing out on potential capital gains.
The researchers pictured a city with a fancy middle and a less fancy outer part. Rich foreigners like the middle, while locals pick where to live based on what they like and how far they have to travel.
When lots of rich outsiders move in, prices for homes in the middle go up. Locals who own property can sell or rent to these foreigners and make some extra money. The extra cash created is called the “foreign resident surplus.”
But there’s a downside: people who stay in the middle now pay more for rent and have less money for other stuff. Some might move to the outer part and deal with longer commutes, making them less productive.
The good and the bad
So, is the good stuff more than the bad stuff?
Yep, say the researchers. The gains from the foreign resident surplus are bigger than the costs for locals. That’s why telling rich foreigners not to come isn’t the best idea – countries miss out on a lot of money. But giving too many perks to foreigners isn’t great either.
To balance things, the researchers suggest taxing the money made from selling property. Governments can then use that cash to help locals deal with the changes in their rent.
Sure, moving to the outer areas comes with its problems. People might not be as effective at work and could spend more time stuck in traffic because there are too many cars. The good stuff that comes with living close together, like having more chances to learn from others, might not be as great in these areas. To make these issues better, the government could use taxes and incentives that change based on where people live and work.
The researchers also thought about other things, like working from home. If people can work from their houses, living outside the city isn’t as bad as it used to be.
