Effective Tax Rates and Effective Progressivity in a Fiscally Decentralized Country∗

This paper proposes measures that quantify the effective level and the effective progressivity of tax schedules in a fiscally decentralized country taking income sorting into account. Using data on the universe of Swiss taxpayers, we find that rich households effectively face significantly lower average and marginal tax rates and lower progressivity than in the benchmark case that does not consider income sorting. This is because high-income households systematically avoid high taxation by locating in low-tax jurisdictions. The results are stronger for singles than for families indicating that singles are more sensitive to spatial tax differentials than families. We find evidence that the Swiss income tax system is effectively regressive for households without children and very high incomes. Our results also hold when we account for the disutility from housing prices into which tax rates capitalize.