The Political Geography of Tax H(E)Avens and Tax Hells

The paper develops a simple multi-jurisdictional model of residential and political choice. Analyzing the interplay of migration, local policies, and geographic factors, we show that equilibrium tax regimes depend on the geographical size of jurisdictions. If geographical differences are modest or small, jurisdictions independently conduct similar tax policies and average incomes converge. In contrast, if the relative size differentials are substantial, i.e. there are very small and large jurisdictions in the system, tax h(e)avens and tax hells emerge. In equilibrium, small jurisdictions are inhabited by wealthy households and conduct low tax policies (tax heavens) while poor households live in large jurisdictions where taxes are high (tax hells). We argue that our results can provide an explanation for the existence and the characteristics of tax havens, as well as some observed regularities in the population structure and the tax pattern of municipalities in the U.S