Tiebout, local school finance and the inefficiency of head taxes
reportposted on 18.04.2011, 08:43 by Francisco Martínez-Mora
The literature on local public (school) nance has shown that the use of local head taxes to nance schools leads to an e¢ cient allocation of households and pupils to districts (Tiebout, 1956; Hamilton, 1975; Calabrese et al., 2009). This paper revises this well established result, using a two-community model with a housing market that adds two layers of realism to the analysis: not every household receives direct bene ts from schools (e.g. some do not have children at school age) and communities are vertically di¤erentiated, in the sense that one of them is exogenously preferred to the other by every household. In such context, head taxation leads to an ine¢ cient allocation of house- holds to districts, even if local governments set local spending levels e¢ ciently given their population. The ine¢ ciency emerges because too many intermediate income "in-school" households reside in the rich district in equilibrium. Income taxation is ine¢ cient as well but, in a counter-intuitive result, it may cause smaller e¢ ciency losses than a lump-sum tax.