Tiebout, local school finance and the inefficiency of head taxes

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.