Who Bears the Burden of Local Taxes?
Who bears the burden of local taxes? Generally speaking, economic theory predicts that the incidence of taxes (and tariffs) is higher on the agent who is more dependent on the good in question, that is, the agent for whom the demand elasticity (in absolute value) or the supply elasticity is highest, as the case may be.
A recent article revisits the problem as it applies to local taxes in Switzerland. The authors develop a structural model that incorporates household mobility, income, and preferences for local public services. Consistent with standard economic theory, the model predicts that market prices adjust following changes in taxes. Specifically, housing prices adjust to reflect property taxes.
Empirical evidence suggests that households with children are less mobile: they are more dependent on local public goods such as schooling, and as such carry a greater burden of property taxes. If local public goods are financed by property taxes, and if relatively poorer households (with children) spend a disproportionately higher share of their income on housing, then this may make property taxes regressive.
Empirically, the paper shows that this is more than a theoretical possibility — it actually happens in Switzerland. The authors empirically find that mobility is largely determined by whether a household has children or not, leading to markedly different patterns of progressivity.
Figure 6, shown below, simulates the effect of a local property tax. The left panel corresponds to households without children, whereas the right panel corresponds to households with children. The vertical axis measures variations in household welfare as a result of the property tax’s implementation. The horizontal axis represents each of ten income deciles, from poorest (left extreme) to richest (right extreme). The lightest line measures the direct effect of the tax. The intermediate line also includes the effect through provision of local services (e.g. schooling). Finally, the darkest line represents the total effect, that is, also including the house rental price effect.
As can be seen, households in the lowest decile become worse off as the result of local property taxes, especially households with children (right panel). (Notice that the vertical scale is different in each panel.)
By contrast, Figure 5, shown below, shows the effect of a hypothetical proportional income tax (that is, a flat tax). Remarkably, even though a flat tax would suggest a “flat” effect across different income levels, the authors estimate that the lowest income bracket would actually be better off. Again, the main effect seems to be through housing prices.
The authors argue that these findings have important policy implications. In particular, if local governments aim to implement equitable tax policies, they should account for how different types of households respond to taxes, not just in terms of financial capacity but also in mobility and service preferences.
Marius Brülhart, Jayson Danton, Raphaël Parchet, and Jörg Schläpfer
Who Bears the Burden of Local Taxes?
American Economic Journal: Economic Policy 2025, 17(1): 464–505