Tax competition and income sorting: Evidence from the Zurich metropolitan area

We provide empirical evidence on the influence of income taxes on the choice of residence of taxpayers at the local government level. The fact that Swiss communities can independently set tax multipliers, thereby shifting the progressive tax scheme that is fixed at the cantonal (state) level, enables us to study the effect of differences in income taxation on individuals' choice of location within an economically and culturally homogeneous region. Using panel IV regressions covering the years 1991-2003 and 171 communities in the Swiss canton of Zurich and spatial error regressions for the 171 communities in 2003, we find substantial evidence of sorting according to income.

Research Highlights► We investigate empirically the inter-jurisdictional income sorting hypothesis. ► Our empirical analysis provides evidence for the income segregation hypothesis. ► High income earners are more likely to reside in low tax communities. ► Low-income earners are more likely to settle in high tax communities. ► The tax burden in neighbouring communities is of importance.