Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/232459 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 8862
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
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.
Subjects: 
fiscal federalism
decentralized taxation
redistribution
progressive income taxes
JEL: 
H73
H77
H71
Document Type: 
Working Paper
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