Abstract
This study investigates spatial segregation of the population in fiscally decentralized urban areas. The theoretical part proposes the progressivity of local income taxes as a new explanation for income segregation. The empirical part studies how income tax differentials across municipalities in the Swiss metropolitan area of Basel affect the households' location decisions. The (multinomial) location choice of households is investigated within the framework of the random utility maximization model (RUM). The theoretical model is used to identify the household preferences applied in the RUM. The empirical results show that rich households are significantly and substantially more likely to move to low-tax municipalities than poor households.
Highlights
Fiscal Federalism is often viewed as the natural counterpart of decentralized decision making. Oates (1972) for example argued that local units deciding upon public programs are more likely to trade off costs against benefits if these programs are financed by local taxes
Different tax rates can be the result of different economic resources of the local population, since rich local jurisdictions can raise the same revenue with lower tax rates as poor ones
The estimated multinomial response models show that rich households are significantly and substantially more likely to move to low-tax communities than poor households
Summary
Fiscal Federalism is often viewed as the natural counterpart of decentralized decision making. Oates (1972) for example argued that local units deciding upon public programs are more likely to trade off costs against benefits if these programs are financed by local taxes. Oates (1972) for example argued that local units deciding upon public programs are more likely to trade off costs against benefits if these programs are financed by local taxes. While the virtues of decentralized financial responsibility are uncontested, the resulting tax differentials are highly disputed. Tax differentials can be the consequence of different preferences for the level of locally provided public goods. Different tax rates can be the result of different economic resources of the local population, since rich local jurisdictions can raise the same revenue with lower tax rates as poor ones. This paper addresses the question whether tax differentials across local jurisdictions are not just the consequence and the cause of differences in local average income
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