Working Paper: CEPR ID: DP10114
Authors: Marius Brlhart; Sam Bucovetsky; Kurt Schmidheiny
Abstract: Most cities enjoy some autonomy over how they tax their residents, and that autonomy is typically exercised by multiple municipal governments within a given city. In this chapter, we document patterns of city-level taxation across countries, and we review the literature on a number of salient features affecting local tax setting in an urban context. Urban local governments on average raise some ten percent of total tax revenue in OECD countries and around half that share in non-OECD countries. We show that most cities are highly fragmented: urban areas with more than 500,000 inhabitants are divided into74 local jurisdictions on average. The vast majority of these cities are characterized by a central municipality that strongly dominates the remaining jurisdictions in terms of population. These empirical regularities imply that an analysis of urban taxation needs to take account of three particular features: interdependence among tax-setting authorities(horizontally and vertically), jurisdictional size asymmetries, and the potential for agglomeration economies. We survey the relevant theoretical and empirical literatures, focusing in particular on models of asymmetric tax competition, of taxation and income sorting and of taxation in the presence of agglomeration rents.
Keywords: agglomeration; cities; fiscal federalism; local taxation; population sorting; tax competition
JEL Codes: H71; H73; R28; R51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local tax decisions are horizontally interdependent (H73) | Tax base and decisions of neighboring municipalities (H73) |
| Tax rates set by one municipality (H71) | Tax base of neighboring municipalities (H70) |
| Jurisdictional size asymmetries (H73) | Tax rates (H29) |
| Larger municipalities (H70) | Higher tax rates (H29) |
| Agglomeration economies (R11) | Tax policy (H29) |
| Location decisions of firms and individuals (R32) | Tax revenues (H29) |