Abstract
This paper provides novel evidence on the role of income taxes for residential rents and spatial sorting. Drawing on comprehensive apartment-level data, we identify the effects of tax differentials across municipal boundaries in Switzerland. The boundary discontinuity design (BDD) corrects for unobservable location characteristics such as environmental amenities or the access to public goods and thereby reduces the estimated response of housing prices by one half compared to conventional estimates: we identify an income tax elasticity of rents of about 0.26. We complement this approach with census data on local sociodemographic characteristics and show that about one third of this effect can be traced back to a sorting of high-income households into low-tax municipalities. These findings are robust to a matching approach (MBDD) which compares identical residences on opposite sides of the boundary and a number of further sensitivity checks.
Highlights
Location decisions of individuals depend among others on neighborhood attributes as well as on the bundle of taxes and public goods offered by local governments. Tiebout (1956) pointed out that mobile citizens weigh the costs and benefits of public goods provided at the local level and thereby induce competition among municipalities and regions that yields an efficient provision of public goods and a sorting of households according to their preferred bundles
Local income taxes directly capitalize in housing prices and indirectly affect the latter through a spatial sorting of households according to income
The degree of capitalization and spatial sorting is of key importance for the optimal design of many policy measures as well as for the configuration of fiscal federalism in general
Summary
Location decisions of individuals depend among others on neighborhood attributes as well as on the bundle of taxes and public goods offered by local governments. Tiebout (1956) pointed out that mobile citizens weigh the costs and benefits of public goods provided at the local level and thereby induce competition among municipalities and regions that yields an efficient provision of public goods and a sorting of households according to their preferred bundles. A marginal difference in local taxes between two municipalities providing the same quality of public goods capitalizes in the price for housing as residents have to be compensated for an increase in taxes by a decline in housing prices. Apart from this direct effect, tax differentials are likely to induce a sorting of households across jurisdictions because rich households have a relatively stronger preference for low taxes than poor households if taxes are progressive or preferences are non-homothetic (see Schmidheiny, 2006a). Low-tax jurisdictions are characterized by higher incomes which raises housing prices further
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