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Tiebout, local school finance and the inefficiency of head taxes

By Francisco Martínez-Mora

Abstract

The literature on local public (school) nance has shown that the\ud use of local head taxes to nance schools leads to an e¢ cient allocation\ud of households and pupils to districts (Tiebout, 1956; Hamilton, 1975;\ud Calabrese et al., 2009). This paper revises this well established result,\ud using a two-community model with a housing market that adds two\ud layers of realism to the analysis: not every household receives direct\ud bene ts from schools (e.g. some do not have children at school age)\ud and communities are vertically di¤erentiated, in the sense that one\ud of them is exogenously preferred to the other by every household. In\ud such context, head taxation leads to an ine¢ cient allocation of house-\ud holds to districts, even if local governments set local spending levels\ud e¢ ciently given their population. The ine¢ ciency emerges because\ud too many intermediate income "in-school" households reside in the\ud rich district in equilibrium. Income taxation is ine¢ cient as well but,\ud in a counter-intuitive result, it may cause smaller e¢ ciency losses than\ud a lump-sum tax

Publisher: Dept. of Economics, University of Leicester
Year: 2010
OAI identifier: oai:lra.le.ac.uk:2381/9244

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