How Fiscal Decentralization Flattens Progressive Taxes

We study the tension between fiscal decentralization and progressive taxation. We present a multi-community model in which households differ in incomes and housing preferences and in which the local income tax rate is a function of an exogenous progressive tax schedule and an endogenous local tax shifter. The progressivity of the tax schedule induces a self-sorting process that results in substantial though imperfect income sorting. The actual tax structure is thus less progressive than the exogenous tax schedule. Empirical evidence from the largest Swiss metropolitan area supports the predictions of our model.

[1]  H. P. Young,et al.  Progressive Taxation and Equal Sacrifice , 1990 .

[2]  R. Disney Household Saving Rates and the Design of Social Security Programmes: Evidence from a Country Panel , 2005, SSRN Electronic Journal.

[3]  Christian Habermann,et al.  Risk Sharing and Efficiency Implications of Progressive Pension Arrangements , 2005, SSRN Electronic Journal.

[4]  A. Glazer,et al.  The Desire for Impact , 2005, SSRN Electronic Journal.

[5]  Dennis Epple,et al.  Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes , 1998 .

[6]  Stefan C. Wolter,et al.  Demographic Change and Public Education Spending: A Conflict between Young and Old? , 2005, SSRN Electronic Journal.

[7]  J. Binswanger Risk management of pensions from the perspective of loss aversion , 2007 .

[8]  Dennis Epple,et al.  Estimating Equilibrium Models of Local Jurisdictions , 1998, Journal of Political Economy.

[9]  L. Danziger Output Effects of Inflation with Fixed Price- and Quantity-Adjustment Costs , 2005, SSRN Electronic Journal.

[10]  W. Oates,et al.  An Essay on Fiscal Federalism , 1999 .

[11]  Paul De Grauwe,et al.  Non-Linearities in the Relation between the Exchange Rate and its Fundamentals , 2005, SSRN Electronic Journal.

[12]  Thomas Romer,et al.  Mobility and Redistribution , 1991, Journal of Political Economy.

[13]  M. Feldstein,et al.  Can State Taxes Redistribute Income? , 1994 .

[14]  H. Gersbach,et al.  Self-Financing Environmental Mechanisms , 2005, SSRN Electronic Journal.

[15]  R. MacDonald,et al.  Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade , 2005, SSRN Electronic Journal.

[16]  Kurt Schmidheiny,et al.  Income Segregation from Local Income Taxation When Households Differ in Both Preferences and Incomes , 2005 .

[17]  H. Verbon,et al.  The international spillover effects of pension reform , 2005, SSRN Electronic Journal.

[18]  M. Gérard Multijurisdictional Firms and Governments' Strategies Under Alternative Tax Designs , 2005, SSRN Electronic Journal.

[19]  A. Glazer,et al.  Subsidizing Enjoyable Education , 2005, SSRN Electronic Journal.

[20]  Yannis M. Ioannides NEIGHBORHOOD INCOME DISTRIBUTIONS , 2004 .

[21]  Volker Grossmann,et al.  Distribution of Natural Resources, Entrepreneurship, and Economic Development: Growth Dynamics with Two Elites , 2005, SSRN Electronic Journal.

[22]  R. Musgrave,et al.  Income Tax Progression, 1929-48 , 1948, Journal of Political Economy.

[23]  J. Formby,et al.  The Income Elasticity of Demand for Housing: Evidence from Concentration Curves , 1996 .

[24]  Annalisa Luporini,et al.  Ownership Concentration, Monitoring and Optimal Board Structure , 2005, SSRN Electronic Journal.

[25]  David S. Evans,et al.  Curing Sinus Headaches and Tying Law: An Empirical Analysis of Bundling Decongestants and Pain Relievers , 2005, SSRN Electronic Journal.

[26]  Antonis Adam,et al.  Turkish Delight for Some, Cold Turkey for Others?: The Effects of the Eu-Turkey Customs Union , 2005, SSRN Electronic Journal.

[27]  C. Keuschnigg,et al.  A growth oriented dual income tax , 2005, SSRN Electronic Journal.

[28]  Piotr Wdowinski,et al.  Financial Markets and Economic Growth in Poland: Simulations with an Econometric Model , 2005, Social Science Research Network.

[29]  Panu Poutvaara Social Security Incentives, Human Capital Investment and Mobility of Labor , 2005, SSRN Electronic Journal.

[30]  Kurt Schmidheiny,et al.  Income Segregation and Local Progressive Taxation: Empirical Evidence from Switzerland , 2004, SSRN Electronic Journal.

[31]  Robert J. Gary-Bobo,et al.  Sharing Budgetary Austerity Under Free Mobility and Asymmetric Information: An Optimal Regulation Approach to Fiscal Federalism , 2005, SSRN Electronic Journal.

[32]  Silke Uebelmesser,et al.  Migration and the welfare state: The economic power of the non-voter? , 2005, SSRN Electronic Journal.

[33]  F. Ploeg Chapter 34 The Making of Cultural Policy: A European Perspective⁎ , 2005 .

[34]  W. Peters,et al.  Justifying the Lindahl solution as an outcome of fair cooperation , 2005, SSRN Electronic Journal.

[35]  Stephen L. Ross,et al.  Chapter 47 Sorting and voting: A review of the literature on urban public finance , 1999 .

[36]  Marc Schramm,et al.  Putting New Economic Geography to the Test: Free-Ness of Trade and Agglomeration in the EU Regions , 2005, SSRN Electronic Journal.

[37]  Yu-Fu Chen,et al.  Product Market Competition, Investment and Employment-Abundant Versus Job-Poor Growth: A Real Options Perspective , 2005, SSRN Electronic Journal.

[38]  S. K. Mayo,et al.  Theory and estimation in the economics of housing demand , 1981 .

[39]  David G. Davies,et al.  The Theory of Public Finance , 1960 .

[40]  J. Formby,et al.  Estimating the Income Elasticity of Demand for Housing: A Comparison of Traditional and Lorenz-Concentration Curve Methodologies☆ , 1998 .

[41]  Timothy J. Goodspeed A re-examination of the use of ability to pay taxes by local governments , 1989 .

[42]  A. Kemnitz Can Immigrant Employment Alleviate the Demographic Burden? The Role of Union Centralization , 2005, SSRN Electronic Journal.

[43]  Frank Westhoff,et al.  Existence of equilibria in economies with a local public good , 1977 .

[44]  Saku Aura,et al.  Optimal Commodity Taxation When Land and Structures Must Be Taxed at the Same Rate , 2005 .

[45]  Jovan Žamac,et al.  Pension Design When Fertility Fluctuates: The Role of Capital Mobility and Education Financing , 2005, SSRN Electronic Journal.

[46]  Yannis M. Ioannides,et al.  Neighbors’ income distribution: economic segregation and mixing in US urban neighborhoods , 2004 .

[47]  B. Ellickson Jurisdictional Fragmentation and Residential Choice , 1971 .

[48]  H. Kitchen,et al.  Canadian tax policy , 2001 .