SFB 303 Discussion Paper No. A - 541

Author: Hansen, Nico A., and Anke S. Kessler
Title: The Political Geography of Tax H(e)avens and Tax Hells
Abstract: We analyze decentral income taxation in a federal system. Individuals are free to migrate between politically independent jurisdictions, in which local policies are determined by majority rule of the residents. Tax regimes in equilibrium depend on the relative geographical size of the jurisdictions. If their relative size is modest, taxation and redistribution levels are equal and similar to a central system. If, however, relative size is extreme, i. e. with very small and very large regions, tax heavens and tax hells can evolve. Small jurisdictions will be inhabited by rich households and will conduct low tax policies (tax heavens), while poor households live in large jurisdictions where taxes are high (tax hells). We thus establish that huge geographical differences translate into political as well as economic divergence of jurisdictions.
Keywords: Income Taxation, Migration, Fiscal Federalism, Redistribution
JEL-Classification-Number: H71, H73
Creation-Date: January 1997
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