The effect of a progressive taxation scheme on the endogenous formation of jurisdictions

• Author: Remy Oddou
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/jpet.12462
• Date: 01 September 2020

J Public Econ Theory. 2020;22:1705–1712. wileyonlinelibrary.com/journal/jpet © 2020 Wiley Periodicals LLC

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1705

Received: 24 July 2019

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Accepted: 21 June 2020

DOI: 10.1111/jpet.12462

ORIGINAL ARTICLE

The effect of a progressive taxation scheme on

the endogenous formation of jurisdictions

Remy Oddou

Economix, UPL, CNRS, Université Paris

Nanterre, Nanterre, France

Correspondence

Remy Oddou, Economix, UPL, CNRS,

Université Paris Nanterre, F92000

Nanterre, France.

Email: remy.oddou@free.fr

Abstract

This paper analyzes the effect of a progressive taxation

scheme on the segregative properties of the endogenous

formation of jurisdictions. Households living in the

same place form a jurisdiction which aims to produce a

local public good and implement a redistribution policy

by granting every household a demogrant of an amount

determined by the jurisdiction. In every jurisdiction,

production of local public services and the demogrant

are financed with a local tax based upon the households

wealth. Local wealth tax rates and the level of the de-

mogrant are exogenously determined in every jurisdic-

tion. Households are free to leave their jurisdiction for

another jurisdiction that would provide them with their

highest utility. We found that the existence of a de-

mogrant seems to mitigate the segregative properties of

endogenous jurisdiction formation, because the condi-

tion identified by Gravel and Thoron to ensure segre-

gation of any stable jurisdiction structure remains

necessary, but is no longer sufficient.

1|INTRODUCTION

Local jurisdictions have a well‐known role: the production of public goods. However, more and

more, they choose to have a hand in wealth redistribution. Although, in most countries, local

taxation is proportional, which prevents the implementation of a redistributive taxation policy,

jurisdictions have other ways to implement a policy to reduce wealth inequality. They can, for

instance, provide a demogrant to households.

As highlighted by many economists, segregation by wealth seems to be an expanding

phenomenon. Within an urban area, one can observe jurisdictions with mainly poor