Income Taxes, Sorting, and the Costs of Housing: Evidence from Municipal Boundaries in Switzerland

This paper provides novel evidence on the role of income taxes for residential rents and spatial sorting. Drawing on comprehensive micro-level data, we identify the responsiveness of households to tax differentials across municipal boundaries in Switzerland. The boundary discontinuity design corrects for unobservable location characteristics such as environmental amenities or the access to public goods: parsing out the sorting component within a discrete choice framework, we identify an income tax elasticity of rents of about -0.3. We complement this approach with counterfactual calculations that show how the homogenization of taxes across jurisdictions affects housing prices and indirect utility of households.