On Tax Preferences and Fiscal Competition

Abstract: In the first paper I am using Swedish survey data on people’s opinion about the municipal earned income tax to assess what shapes people’s preferences about this tax. The central result is that the tax rate actually faced by the respondents is not important for these preferences. I find no evidence of that this is due to Tiebout sorting; that is, people have not moved to municipalities with their preferred tax rate. A possible explanation is that people do not know the actual tax rate in their municipality. The second paper is theoretical and shows how a central government can induce a policy concerning a municipal matter through a package of a policy implementation and a grant. We find that, due to fiscal competition and the possibility for citizens to move between municipalities, the central government can make all municipalities adopt the policy requirement although the grant is not sufficiently high to make them gain financially from the reform. We apply this model to a recent Swedish child-care fee reform and can explain why all Swedish municipalities implemented the maximum child care fee although it had a negative impact on many municipalities’ finances.