Tiebout sorting with progressive income taxation and a fiscal equalization scheme

Abstract

This paper develops a model of Tiebout sorting with decentrally determined progressive income taxation and a built-in fiscal equalization scheme that redistributes money from richer to poorer regions. Both aspects are central to policy makers: the progressivity for equity reasons and the fiscal equalization to prevent an underprovision of the publicly provided good and to limit the degree of segregation of households according to income. The model is calibrated to the metropolitan area of Zurich (Switzerland), and policy evaluations reveal that a progressive tax scheme as the basis for decentrally determined tax rates causes strong segregating forces that can only to some extent be compensated by the fiscal equalization scheme.