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

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  • Kurt Schmidheiny

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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Bibliographic Info

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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  1. Kurt Schmidheiny, 2002. "Income Stratifcation in Multi-Community Models," Diskussionsschriften dp0215, Universitaet Bern, Departement Volkswirtschaft.
  2. 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.
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  7. Paul W. Rhode & Koleman S. Strumpf, 2003. "Assessing the Importance of Tiebout Sorting: Local Heterogeneity from 1850 to 1990," American Economic Review, American Economic Association, vol. 93(5), pages 1648-1677, December.
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  11. Schmidheiny, Kurt, 2006. "Income segregation and local progressive taxation: Empirical evidence from Switzerland," Journal of Public Economics, Elsevier, vol. 90(3), pages 429-458, February.
  12. 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.
  13. 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.
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  21. 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.
  22. 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.
  23. 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.
  24. 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.
  25. 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.
  26. 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.
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