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How Fiscal Decentralization Flattens Progressive Taxes

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  • Roland Hodler
  • Kurt Schmidheiny

Abstract

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 multiplier. The progression of the tax schedule induces a self-sorting process that results in substantial though imperfect income sorting. Considering this income sorting, the resulting tax schedule is less progressive than the exogenous tax schedule. Empirical evidence from the largest Swiss metropolitan area supports the predictions of our model.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 62 (2006)
Issue (Month): 2 (June)
Pages: 281-304

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200606)62:2_281:hfdfpt_2.0.tx_2-m

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Keywords: Progressive Taxation; Fiscal Decentralization; Income Segregation;

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References

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  1. Ellickson, Bryan, 1971. "Jurisdictional Fragmentation and Residential Choice," American Economic Review, American Economic Association, vol. 61(2), pages 334-39, May.
  2. Martin Feldstein & Marian Vaillant, 1994. "Can State Taxes Redistribute Income?," NBER Working Papers 4785, National Bureau of Economic Research, Inc.
  3. Mayo, Stephen K., 1981. "Theory and estimation in the economics of housing demand," Journal of Urban Economics, Elsevier, vol. 10(1), pages 95-116, July.
  4. Kurt Schmidheiny, 2005. "Income Segregation from Local Income Taxation When Households Differ in Both Preferences and Incomes," Discussion Papers Series, Department of Economics, Tufts University 0509, Department of Economics, Tufts University.
  5. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
  6. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
  7. Young, H Peyton, 1990. "Progressive Taxation and Equal Sacrifice," American Economic Review, American Economic Association, vol. 80(1), pages 253-66, March.
  8. Kurt Schmidheiny, 2003. "Income Segregation and Local Progressive Taxation: Empirical Evidence from Switzerland," Diskussionsschriften dp0311, Universitaet Bern, Departement Volkswirtschaft.
  9. Westhoff, Frank, 1977. "Existence of equilibria in economies with a local public good," Journal of Economic Theory, Elsevier, vol. 14(1), pages 84-112, February.
  10. Ross, Stephen & Yinger, John, 1999. "Sorting and voting: A review of the literature on urban public finance," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 47, pages 2001-2060 Elsevier.
  11. Hansen, Julia L. & Formby, John P. & Smith, W. James, 1996. "The Income Elasticity of Demand for Housing: Evidence from Concentration Curves," Journal of Urban Economics, Elsevier, vol. 39(2), pages 173-192, March.
  12. Epple, Dennis & Platt, Glenn J., 1998. "Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes," Journal of Urban Economics, Elsevier, vol. 43(1), pages 23-51, January.
  13. Hansen, Julia L. & Formby, John P. & Smith, W. James, 1998. "Estimating the Income Elasticity of Demand for Housing: A Comparison of Traditional and Lorenz-Concentration Curve Methodologies," Journal of Housing Economics, Elsevier, vol. 7(4), pages 328-342, December.
  14. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
  15. Hardman, Anna & Ioannides, Yannis M., 2004. "Neighbors' income distribution: economic segregation and mixing in US urban neighborhoods," Journal of Housing Economics, Elsevier, vol. 13(4), pages 368-382, December.
  16. Goodspeed, Timothy J., 1989. "A re-examination of the use of ability to pay taxes by local governments," Journal of Public Economics, Elsevier, vol. 38(3), pages 319-342, April.
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Citations

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Cited by:
  1. Antoni Calvo-Armengol & Yannis M. Ioannides, 2005. "Social Networks in Labor Markets," Discussion Papers Series, Department of Economics, Tufts University 0517, Department of Economics, Tufts University.
  2. Darlene C. Chisholm & Margaret S. McMillan & George Norman, 2005. "Product Differentiation and Film Programming Choice: Do First-Run Movie Theatres Show the Same Films?," Discussion Papers Series, Department of Economics, Tufts University 0523, Department of Economics, Tufts University.
  3. Kai Konrad & Stergios Skaperdas, 2012. "The market for protection and the origin of the state," Economic Theory, Springer, vol. 50(2), pages 417-443, June.
  4. Kurt Schmidheiny, 2004. "Income Segregation and Local Progressive Taxation: Empirical Evidence from Switzerland," CESifo Working Paper Series 1313, CESifo Group Munich.
  5. Christoph A. Schaltegger & Frank Somogyi & Jan-Egbert Sturm, 2009. "Tax Competition and Income Sorting: Evidence from the Zurich Metropolitan Area," CESifo Working Paper Series 2824, CESifo Group Munich.
  6. Gilbert E. Metcalf & Jongsang Park, 2006. "A Comment on The Role of Prices for Excludable Public Goods," NBER Working Papers 12535, National Bureau of Economic Research, Inc.
  7. Yannis M. Ioannides & Adriaan R. Soetevent, 2005. "Social Networking and Individual Outcomes Beyond the Mean Field Case," Discussion Papers Series, Department of Economics, Tufts University 0521, Department of Economics, Tufts University.
  8. Darlene Chisholm & George Norman, 2005. "When to Exit a Product: Evidence from the U.S. Motion-Pictures Exhibition Market," Discussion Papers Series, Department of Economics, Tufts University 0522, Department of Economics, Tufts University.
  9. Sergii Slukhai, 2009. "Inter-Location Small Business Tax Rate Variation in Ukraine: What Is Behind It?," Financial Theory and Practice, Institute of Public Finance, vol. 33(1), pages 49-71.

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