Fiscal federalism and income inequality: An empirical analysis for Switzerland

Traditional theory implies that fiscal federalism hinders redistribution and increases inequality. Decentralization might however improve predistribution. To obtain more precise empirical evidence on this relationship we introduce an interaction between tax decentralization and jurisdictional fragmentation and analyze its impact on pre-vs. after-tax inequality. The empirical strategy relies on the unique institutional setting and data consistency in Switzerland which allows to exploit cantonal variance since 1945. According to our findings, tax decentralization reduces income inequality as long as jurisdictional fragmentation remains limited. Significant effects in pre-tax income suggest an impact via the predistribution instead of the redistribution channel. (c) 2021 Elsevier B.V. All rights reserved.