The effect of a progressive taxation scheme on the endogenous formation of jurisdictions

Abstract

AbstractThis paper analyzes the effect of a progressive taxation scheme on the segregative properties of the endogenous formation of jurisdictions. Households living in the same place form a jurisdiction which aims to produce a local public good and implement a redistribution policy by granting every household a demogrant of an amount determined by the jurisdiction. In every jurisdiction, production of local public services and the demogrant are financed with a local tax based upon the households wealth. Local wealth tax rates and the level of the demogrant are exogenously determined in every jurisdiction. Households are free to leave their jurisdiction for another jurisdiction that would provide them with their highest utility. We found that the existence of a demogrant seems to mitigate the segregative properties of endogenous jurisdiction formation, because the condition identified by Gravel and Thoron to ensure segregation of any stable jurisdiction structure remains necessary, but is no longer sufficient.