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Income Segregation from Local Income Taxation When Households Differ in Both Preferences and Incomes

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Kurt Schmidheiny

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Abstract

This paper presents a model of an urban area with local income taxes used to finance a local public good. Households differ in both incomes and their taste for housing. The existence of a segregated equilibrium is shown in a calibrated two-community model assuming single-peaked distributions for both income and housing taste. The equilibrium features income segregation of the population across the communities. The segregation is, however, imperfect: some rich households can also be found in poor communities and vice-versa. The calibrated model is able to explain the substantial differences in local income tax levels and average incomes across communities as observed in e.g. Switzerland. The numerical investigation reveals that the ordering of community characteristics critically depends on the substitutability between the public and the private good. The numerical investigation also suggests that taste heterogeneity reduces the distributional effects of local tax differences. The numerical investigation furthermore suggests that the rich community is able to set lower taxes when it is small.

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Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0509.

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Date of creation: 2005
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Handle: RePEc:tuf:tuftec:0509

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Keywords: Income Segregation Income Sorting Fiscal Decentralization Income Taxation Local Public Goods

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Find related papers by JEL classification:
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nico A. Hansen & Anke S. Kessler, 2001. "The Political Geography of Tax H(e)avens and Tax Hells," American Economic Review, American Economic Association, vol. 91(4), pages 1103-1115, September. [Downloadable!] (restricted)
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  3. Epple, Dennis & Filimon, Radu & Romer, Thomas, 1984. "Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice," Journal of Public Economics, Elsevier, vol. 24(3), pages 281-308, August. [Downloadable!] (restricted)
  4. Kurt Schmidheiny, 2002. "Income Stratifcation in Multi-Community Models," Diskussionsschriften dp0215, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  5. Epple, Dennis & Filimon, Radu & Romer, Thomas, 1993. "Existence of voting and housing equilibrium in a system of communities with property taxes," Regional Science and Urban Economics, Elsevier, vol. 23(5), pages 585-610, November. [Downloadable!] (restricted)
  6. Thomas. J. Nechyba, 1997. "Existence of equilibrium and stratification in local and hierarchical Tiebout economies with property taxes and voting," Economic Theory, Springer, vol. 10(2), pages 277-304. [Downloadable!] (restricted)
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  7. Hansen, Nico A. & Kessler, Anke S., 2001. "(Non-)Existence of Equilibria in Multicommunity Models," Journal of Urban Economics, Elsevier, vol. 50(3), pages 418-435, November. [Downloadable!] (restricted)
  8. Kurt Schmidheiny, 2004. "Income Segregation and Local Progressive Taxation: Empirical Evidence from Switzerland," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  9. 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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
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  11. Ellickson, Bryan, 1971. "Jurisdictional Fragmentation and Residential Choice," American Economic Review, American Economic Association, vol. 61(2), pages 334-39, May. [Downloadable!] (restricted)
  12. Konishi, Hideo, 1996. "Voting with Ballots and Feet: Existence of Equilibrium in a Local Public Good Economy," Journal of Economic Theory, Elsevier, vol. 68(2), pages 480-509, February. [Downloadable!] (restricted)
  13. Patrick Bayer & Robert McMillan & Kim Rueben, 2003. "An Equilibrium Model of Sorting in an Urban Housing Market: A Study of the Causes and Consequences of Residential Segregation," Working Papers 03-01, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  14. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
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  17. Kessler, Anke S. & Lulfesmann, Christoph, 2005. "Tiebout and redistribution in a model of residential and political choice," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 501-528, February. [Downloadable!] (restricted)
  18. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August. [Downloadable!] (restricted)
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  20. Hindriks, Jean, 2001. " Mobility and Redistributive Politics," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(1), pages 95-120. [Downloadable!] (restricted)
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  21. 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. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gilbert E. Metcalf & Jongsang Park, 2005. "A Comment on the Role of Prices for Excludable Public Goods," Discussion Papers Series, Department of Economics, Tufts University 0524, Department of Economics, Tufts University. [Downloadable!]
    Other versions:
  2. Roland Hodler & Kurt Schmidheiny, 2005. "How Fiscal Decentralization Flattens Progressive Taxes," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
  4. 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. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
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