Decentralization and Progressive Taxation

Arbeitspapier

The traditional normative literature on fiscal federalism argues that redistributive policies should be centralized in order to avoid welfare- or tax-induced migration. However, recent evidence shows that even in a setup where the progressivity of the income tax schedule is centralized to an upper-layer government and local governments are involved in tax competition with only a tax shifter, local mobility induces income sorting. Hence, despite centralized redistributive taxation, the resulting effective tax schedule is less progressive than what is set in the tax code. We argue that upper-layer governments anticipate the impact of local income sorting and strategically adjust their statutory tax schedules. We analyze Swiss panel data and apply causal machine learning methods to identify the effects of decentralization on the statutory tax structure. We provide evidence that more decentralized cantons reduce the tax burden for lower and intermediate income classes and hence implement more redistributive statutory tax schedules. This strategic adjustment is limited by the mobility of the tax base.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8862

Classification and Topics

• Classification: Wirtschaft ; State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects ; Intergovernmental Relations; Federalism; Secession ; State and Local Taxation, Subsidies, and Revenue
• Subject: fiscal federalism ; decentralized taxation ; redistribution ; progressive income taxes

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Berset, Simon ; Schelker, Mark
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/232459
• Last update: 10.03.2025, 11:43 AM CET