November 2017 Local income tax competition with progressive taxes and a fiscal equalization scheme WWZ Working Paper 2017/17 Florian Kuhlmey A publication of the Center of Business and Economics (WWZ), University of Basel. WWZ 2017 and the authors. Reproduction for other purposes than the personal use needs the permission of the authors. Universität Basel Corresponding Author: Peter Merian-Weg 6 Florian Kuhlmey 4052 Basel, Switzerland Tel: +41 (0) 61 207 33 80 wwz.unibas.ch Mail:
[email protected] Local income tax competition with progressive taxes and a fiscal equalization scheme∗ Florian Kuhlmeyy Faculty of Business and Economics, University of Basel November 29, 2017 Abstract This paper develops a model of local income tax competition with a progressive tax scheme and a built-in fiscal equalization scheme. Both aspects are central to policy makers: The progressivity for equity reasons, and the fiscal equalization to prevent a race to the bottom 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 local tax competition causes strong segregating forces that can only to some extent be compensated by the fiscal equalization scheme. JEL Codes H3, H7, R1, R2; Keywords Tax competition; income taxation; fiscal equalization; progressive taxation; segre- gation. ∗This work was supported by the WWZ-Forum (FV-55). The author declares that he has no relevant or material financial interests that relate to the research described in this paper. yPeter-Merian-Weg 6, CH-4002 Basel, Switzerland.