Progressive Taxation, Commuting Costs and Residential Decisions in Fiscally Decentralized Cities

Decentralized taxation and commuting affect numerous dimensions of economic activity, but how they jointly shape residential decisions and spatial income sorting is still not well understood. We develop a structural model of individual location choices in a fiscally decentralized monocentric city with explicit commuting costs. Spatial income sorting arises from decentralized progressive income taxes and non-homothetic housing preferences. Progressive taxation impacts high-income individuals’ utility more markedly, hence reducing their commuting disutility. This induces high incomes to be more willing to commute to low-tax jurisdictions. We estimate our model using micro-level data on moving decisions in Switzerland. Based on a random utility framework, we find that richer individuals are more sensitive to taxes and less sensitive to commuting. Further, our results show that lower local taxes directly increase individuals’ willingness to commute. In a counterfactual exercise, we show that uniform taxation within urban areas would lead to more high-income individuals locating in central jurisdictions, hence enduring shorter commutes