An Empirical Test of Migration and Fiscal Externality

Tiebout hypothesis posits that residential sorting can lead to efficient provision of local public goods in a decentralized society. By contraries, literatures on tax competition find two types of tax externalities where different hierarchical government levels locally tax the same base: a horizontal tax externality working among governments of the same level would bring to tax rates that are too low compared to social optimum; but a vertical tax externality acting between different levels of governments would yield suboptimally high tax rates. This paper aims to empirically investigate the two contrary hypotheses about fiscal decentralization by using Swedish regional data during the period 2000- 2006. Consequently, our empirical results derive two conclusions. First, Tiebout’s argument appears to be valid only if there is some available housing on the market. Second, contrary to Brülhart and Jametti (2006, Journal of Public Economics 90, pp.2027-2067), a dominant horizontal tax externality would lower suboptimally municipal tax rates.