Progressive Taxation, Commuting Costs and Residential Decisions in Fiscally Decentralized Cities

56 Pages Posted: 16 Feb 2023

See all articles by Nicola Mauri

Nicola Mauri

University of Lausanne; Swiss Federal Tax Administration

Zuchuat Jeremy

University of Lausanne - Department of Economics

Date Written: February 14, 2023

Abstract

Decentralized taxation and commuting affect numerous dimensions of economic activity, but how they jointly shape residential decisions and spatial income sorting is still not well understood. We develop a structural model of individual location choices in a fiscally decentralized monocentric city with explicit commuting costs. Spatial income sorting arises from decentralized progressive income taxes and non-homothetic housing preferences. Progressive taxation impacts high-income individuals’ utility more markedly, hence reducing their commuting disutility. This induces high incomes to be more willing to commute to low-tax jurisdictions. We estimate our model using micro-level data on moving decisions in Switzerland. Based on a random utility framework, we find that richer individuals are more sensitive to taxes and less sensitive to commuting. Further, our results show that lower local taxes directly increase individuals’ willingness to commute. In a counterfactual exercise, we show that uniform taxation within urban areas would lead to more high-income individuals locating in central jurisdictions, hence enduring shorter commutes.

Keywords: income sorting, commuting, fiscal decentralization, tax differentials, tax progressivity, non-homothetic preferences, regional science

JEL Classification: H71, H73, R23, R41

Suggested Citation

Mauri, Nicola and Jeremy, Zuchuat, Progressive Taxation, Commuting Costs and Residential Decisions in Fiscally Decentralized Cities (February 14, 2023). Available at SSRN: https://ssrn.com/abstract=4357959 or http://dx.doi.org/10.2139/ssrn.4357959

Nicola Mauri (Contact Author)

University of Lausanne ( email )

Quartier Chambronne
Lausanne, CH-1015
Switzerland

Swiss Federal Tax Administration ( email )

Bern
Switzerland

Zuchuat Jeremy

University of Lausanne - Department of Economics ( email )

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