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

Kurt Schmidheiny

No 509, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

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.

Keywords: Income Segregation; Income Sorting; Fiscal Decentralization; Income Taxation; Local Public Goods (search for similar items in EconPapers)
JEL-codes: H71 H73 R13 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Income segregation from local income taxation when households differ in both preferences and incomes (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:tuf:tuftec:0509

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