Culture and Taxes

We propose a difference-in-differences strategy to identify the existence of interjurisdictional tax competition. Our strategy rests on differences between desired tax levels determined by culture-specific preferences and equilibrium tax levels determined by fiscal externalities and by preferences. While preferences differ systematically between French-speaking and German-speaking Swiss municipalities, local income tax burdens exhibit smooth spatial gradients. To qualify the empirical evidence, we develop a theoretical model of strategic tax setting by local governments that anticipate the effects of taxes on the per capita income and the median “hedonic” income, two inextricable consequences of the sorting of heterogeneous individuals.