Income Taxes, Sorting, and the Costs of Housing: Evidence from Municipal Boundaries in Switzerland

48 Pages Posted: 14 Aug 2014

See all articles by Christoph Basten

Christoph Basten

University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)

Maximilian von Ehrlich

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES)

Andrea Lassmann

ETH Zürich - KOF Swiss Economic Institute

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2014

Abstract

This paper provides novel evidence on the role of income taxes for residential rents and spatial sorting. Drawing on comprehensive apartment-level data, we identify the effects of tax differentials across municipal boundaries in Switzerland. The boundary discontinuity design (BDD) corrects for unobservable location characteristics such as environmental amenities or the access to public goods and thereby reduces the estimated response of housing prices by one half compared to conventional estimates: we identify an income tax elasticity of rents of about 0.26. We complement this approach with census data on local sociodemographic characteristics and show that about one third of this effect can be traced back to a sorting of high-income households into low-tax municipalities. These findings are robust to a matching approach (MBDD) which compares identical residences on opposite sides of the boundary and a number of further sensitivity checks.

Keywords: local taxation, income taxation, housing prices, income sorting, boundary discontinuity design, spatial differencing

JEL Classification: H710, H240, R210, R380, C140

Suggested Citation

Basten, Christoph and von Ehrlich, Maximilian and Lassmann, Andrea, Income Taxes, Sorting, and the Costs of Housing: Evidence from Municipal Boundaries in Switzerland (July 29, 2014). CESifo Working Paper Series No. 4896, Available at SSRN: https://ssrn.com/abstract=2479820

Christoph Basten

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40 Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Maximilian Von Ehrlich (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, 80539
Germany

Andrea Lassmann

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

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