Decentralization and Progressive Taxation
Abstract: While an important strand of the literature argues that decentralization might enhance allocative efficiency, standard theory of fiscal federalism also suggests negative redistributive effects. For this reason, centralized redistribution is proposed. The assignment of these two public sector functions, i.e. resource allocation at the local level and income redistribution at the upper level of government, is thus well established. Based on the joint direct taxation system in force in Switzerland – the separation of the decision to set the rate of progression at the cantonal level from the decision to set the ‘level’ of taxation at the municipal level – we investigate the influence of varying degrees of decentralization on the general ‘level’ as well as the degree of redistribution in the cantonal income tax schedules. Our empirical results indicate that more decentralized jurisdictions feature generally lower income taxes and impose higher rates of progression.
