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Sorting, Tax Competition and the Rise of Local Tax Heavens



Parchet R.


Ly T.



Tax competition is a hotly debated economic policy issue among as well as within countries. The increasing mobility of firms and individuals is often seen as a severe constraint on the revenue-raising power of independent jurisdictions. According to the “race-to-the-bottom” hypothesis, competition for a mobile tax base would cause the fall of statutory tax rates and undermine the ability of governments to pursue redistributive policies. By strategically lowering their tax rates, some jurisdictions potentially emerge as winners. They attract wealthy taxpayers whose income would more that compensate for low tax rates and become local tax havens.

Casual empirical evidence of Swiss municipalities suggests that some places indeed emerge as tax havens with (very) low tax rates, a high concentration of top-income taxpayers and high housing prices. These places are often small, have high amenities (e.g. access to a lake) and are well connected to a nearby major urban centre. Yet, not all small and otherwise attractive jurisdictions have low tax rates. And what would prevent other jurisdictions to use strategically their tax rate to become a tax haven? While the logics of tax competition is well understood, there is no comprehensive understanding of the conditions for the emergence of (stable) local tax havens.

Switzerland with its long history of political and fiscal decentralisation, is an ideal setting to study the emergence of local tax havens. The aim of this project is twofolds. First, we plan to extend the theoretical framework developed in Eugster and Parchet (in press), who consider the strategic tax setting of local jurisdictions anticipating the sorting of individuals who are heterogeneous in their income, to a setting where jurisdictions differ in their amenities (e.g. commuting time to the main cities where employments are concentrated). We want to study the role of these asymmetries in explaining why places emerge in equilibrium as local tax haven.

Our theoretical model could then be used to derive counterfactual outcomes and quantify the welfare effect of the emergence of local tax havens. Empirically, we will exploit a rich dataset on tax rates, income distribution statistics and housing prices at the local level since 1945. Following, Fretz, Parchet and Robert-Nicoud (2017), we will exploit the change in accessibility due to the construction of the Swiss highway network that was defined in 1960 by the federal parliament to connect the main cities but only gradually constructed over the following decades. Using pre-highway information on the location of high-income individuals and tax rates, we will calibrate the model to an initial equilibrium and generate counterfactual predictions from the model using changes in commuting time due to the highway network.

The second aim of the project is to take advantage of the rich institutional setting and the long time period to shed new lights on two dimensions related to the mobility of taxpayers and the sorting process. First, we will study the interplay between the location decisions of top-income taxpayers, housing prices and local tax rates in an event study perspective. Building on Parchet (2014), we will use canton-neighbour tax rates as source of exogenous variations in the tax rate differential between municipalities at a cantonal border to estimate long-term tax base and housing price elasticities.

Last, the sorting process could be enriched to consider also partisan sorting, that is the sorting of individuals according to their political preferences. The aim of the last part of the project is to study the extent to which income and partisan sorting are correlated and the role of tax competition in the observed political polarisation of the Swiss political landscape.

Additional information

Start date
End date
48 Months
Funding sources
Swiss National Science Foundation / Project Funding / Humanities and social sciences (Division I)