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Jakobsson 2013 Income Tax Rates in Sweden Vol 11 No 2 Pg157

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eJournal of Tax Research Volume 11, Number 2

December 2013

CONTENTS 

114

Editorial Announcement Binh Tran-Nam and Nolan Sharkey

115

The developing international framework and practice for the exchange of tax related information: i nformation: evolution or change? Michael Dirkis and Brett Bondfield

138

Interpreting tax statutes: imposing purpose on a results based test Rodney Fisher

157

Attitudes toward municipal income tax rates rate s in Sweden: Do people vote with their feet? Niklas Jakobsson

176 This website stores data such as cookies to enable essential site functionality, as well as marketing, personalization, and analytics. You may change your settings at any time or accept the default settings.

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191

Strengthening the validity and reliability of the focus group as a method in tax research Vince Mangioni and Margaret McKerchar 

Taxing capital gains – views from Australia, Canada and the United States John Minas and Youngdeok Lim

216

Tax experiments in the real world Lisa Marriott, John Randal and Kevin K evin Holmes

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© School of Taxation and Business Law (Atax), A Australian ustralian School of Business The University of New South Wales

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ISSN 1448-2398 

 

  eJournal of Tax Research EDITORS OF THIS EDITION 

Associate Professor Binh Tran-Nam

School of Taxation and Business Law (Atax), University of New South Wales

Associate Professor Nolan Sharkey

School of Taxation and Business Law (Atax), University of New South Wales

PRODUCTION EDITOR   Edmond Wong

School of Taxation and Business Law (Atax), University of New South Wales

EDITORIAL BOARD  Professor Robin Boadway

Department of Economics, Queen’s University

Professor Cynthia Coleman

University of Sydney Business School 

Professor Graeme Cooper

Faculty of Law, University of Sydney 

Professor Robert Deutsch

School of Taxation and Business Law (Atax), University of  New South Wales

Professor Chris Evans

School of Taxation and Business Law (Atax), University of  New South Wales

Professor Judith Freedman

Faculty of Law, Oxford University 

Professor Malcolm Gammie

Chambers of Lord Grabiner QC, London

Professsor John Hasseldine 

Paul College of Business and Economics, University of New Hampshire 

Professor Jeyapalan Kasipillai

School of Business, Monash University Sunway Campus

Professor Rick Krever

Department of Law and Taxation, Monash University 

Professor Charles McLure Jr

Hoover Institution, Stanford University

Professor Dale Pinto

Curtin Business School, Curtin University

Professor John Prebble

Faculty of Law, Victoria University of Wellington

Professor Adrian Sawyer This website stores data such as cookies to enable essential site functionality, as well as marketing, Professor Joel Slemrod  personalization, and analytics. You may changeProfessor your settings at any time Jeffrey Waincymer or accept the default settings. Professor Neil Warren Privacy Policy Professor Robin Woellner  Marketing Personalization Analytics Save

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Department of Accounting and Information Systems, University of Canterbury University of Michigan Business School   Faculty of Law, Monash University School of Taxation and Business Law (Atax), University of  New South Wales  School of Taxation and Business Law (Atax), University of  New South Wales 

 

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The eJournal of Tax Research  is a refereed journal that publishes original, scholarly works on all aspects of taxation. It aims to promote timely dissemination of research and public discussion of taxrelated issues, from both theoretical and ppractical ractical perspectives. It provides a ch channel annel for academics, researchers, practitioners, administrators, judges and policy makers to enhance their understanding and knowledge of taxation. The journal emphasises the interdisciplinary nature of taxation.

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eJournal of Tax Research (2013) vol. 11, no. 2, pp. 157-175

Attitudes toward municipal income tax rates in Sweden: Do people vote with their feet?  Niklas Jakobsson*

 Abstract

The factors shaping people's preferences for municipal labor income tax rates in Sweden are assessed using survey data. The tax rate actually faced by the respondents does not have explanatory power for their attitudes toward the tax rate. The hypothesis that this small or nonexistent effect of the actual tax rate is caused by a Tiebout bias finds no support, yet instrumental variable estimations indicate that the actual municipal tax rate may be of importance for attitudes toward the tax rate. Also, people with higher education, people who regularly read a nnewspaper, ewspaper, people who agree with the po political litical left, and  people who state that they are satisfied with their municipal services are less likely to want to decrease decrease the municipal tax. People with low income, people who claim to have a low level of knowledge about society, and people who agree with the  political right are conversely conversely more likely to want to decrease decrease the municipal tax.

1. INTRODUCTION

Individual income taxes are an important part of government revenues in all western countries. To be able to collect these taxes, and since politicians want to get reelected, these taxes need to be perceived as legitimate. What determines people's preferences about income taxes is therefore of great interest. Previous research on tax attitudes has  been able to identify several characteristics that are of associated with people’s tax  preferences. Education, income, self-assessed knowledge about society, and political  preferences are some of the most important factors (e.g., Edlund, 1999, 2000, 2003; Hammar et al., 2009). It has also been shown that what shapes people’s tax  preferences varies significantly a ccording to the particular tax involved (Hammar et al., 2009). In this paper I analyze whether the tax rate an individual faces affects her willingness to change that same tax. Is it the case that people living in high-tax municipalities are This website stores data such as willing to decrease the tax, and individuals living in low-tax municipalities are more cookies to enable essential site more willing to increase the tax? Or, following the Tiebout (1956) argument, (that functionality, as well as marketing,  people will move to localities tthat hat satisfies their preferences for government provided personalization, and analytics. You goods and taxes) do people vote with their feet − by moving − to pay taxes that accord may change your settings at any time with their preferences? These questions are central to this paper, which focuses on or accept the default settings. Swedish municipal taxes on labor income. Privacy Policy * Department of Economics, University of Gothenburg; Nordic Centre of Excellence in Welfare Research, REASSESS; and  Norwegian Social Research Research (NOVA), Norway. Norway. The paper has benefited from comments by seminar seminar participants at University Marketing of Gothenburg, and Norwegian Social Research (NOVA). I would also like to thank Marcus Eliason, Henning Finseraas, Olof Johansson Stenman, Andreas Kotsadam, Eva Mörk, and Katarina Nordblom for useful comments. Personalization Analytics 157

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Attitudes toward municipal income tax rates in Sweden

Sweden has among the highest taxes in the world (OECD, 2005). The municipal labor income tax constitutes the largest source of revenue for the Swedish government, making it v ery important for the financing of the public sector. It is i s also of great significance for individuals since it is the largest tax they pay (Swedish Tax Agency, 2006). That this tax is set at the local level and varies between, but not within, the 290 municipalities also makes it possible to investigate how preferences toward it vary with the actual tax rate faced by individuals. 1  There is a broad literature studying attitudes toward taxation. The earliest study of individual tax preferences (David, 1961) used interview data from Detroit, Michigan. Studying both attitudinal and socio-economic variables, David found that the most important variables are those reflecting self-interest; income and education are most important for preferences regarding income tax. Labor union membership, political  party preference, and preferences regarding the size of the public sector are also important. Edlund (1999, 2000) used Swedish survey data to investigate people's opinions about taxes on e arned income (including those at the national level). He found that most people regard income tax positively and prefer a progressive system, with lower rates for low-income earners and higher rates for high-income earners. He also found that younger people, highly educated individuals, and high-income earners favor less progressivity. Furthermore, research in the U.S. found that people generally have little understanding of tax policies (Roberts et al., 1994). However, using Swedish survey data on tax progressivity, Edlund (2003) found that people have a quite good understanding of tax progressivity, suggesting that the U.S. finding of little understanding is not necessarily generalizable to other countries. If people misperceive the taxes they pay, then having more knowledge could affect their opinions. In particular, if they overestimate the taxes they pay and underestimate the benefits received, then having more knowledge might induce them to support higher taxes, and vice versa (Gemmell et al., 2004). Using Swedish survey data, Hammar et al. (2009) investigated people's opinions about eleven types of tax and found that people who claim to have a low level of knowledge about society preferred to reduce municipal income taxes more than did others. In line with the results in Edlund (1999), the highly educated were less likely to prefer reduced municipal income taxes and more likely to support raised. The same was true for frequent newspaper readers. Those who supported the public sector more (i.e., who identified themselves as left, rather than right, on the political scale), and those with a favorable impression of politicians also generally supported higher municipal income taxes. That trust in the political system is important for willingness to pay taxes is also shown in an experimental setting by Wahl et al. (2010). On the other hand, Kumlin This website stores data such as (2007) found that dissatisfaction with public services in fifteen western European cookies to enable essential site countries was unrelated to support for the welfare state and the taxes required to functionality, as well as marketing, finance it. personalization, and analytics. You may change your settings atPrevious any time or accept the default settings. opinions

studies have not investigated the effect of the tax rate itself on people's about taxes. My hypothesis is that since people are not perfectly mobile across municipalities, people living in high-tax municipalities should be more

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In Sweden, the tax rates on labor income are decided by the municipalities, and vary substantially across municipalities (of which there are 290 in 2004). Unearned income is taxed only at the national level, and there are surtaxes on labor incomes above certain levels. For more information on the Swedish tax system, see the Appendix.

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Attitudes toward municipal income tax rates in Sweden

supportive of decreasing the tax rate and people living in low-tax municipalities should be more supportive of increasing the tax rate. Using survey data, with a net response rate of 64 percent, of a random sample of Swedes aged 15–85, the present  paper assesses what factors are important for people's willingness to change the municipal income tax rate. My findings are that the tax rate actually faced by survey respondents is not very important in determining the respondent's tax preferences. The reason that there is not a clearer effect of the actual tax rate on tax preferences may be related to Tiebout sorting, yet the evidence for this is not strong. Possible explanations are that people do not know the actual tax rate in their municipality (or in others) or that they are subject to status quo bias which means they come to accept the tax rate they face. Also, people with higher education, people who regularly read a newspaper,  people who agree with the political left, and people who state that they are satisfied with their municipal services are less likely to want to decrease the municipal tax. Conversely, people with low income, people who claim to have a low level of knowledge about society, and people who agree with the political right are more likely to want to decrease the municipal tax. The next section describes the data, while Section 3 presents the empirical strategy and theoretical background. Section 4 p resents the empirical results, and Section 5 summarizes and draws conclusions. 2. DATA

The main data consist of responses from a survey mailed to a random sample of 3,000 Swedes aged 18–85 by the SOM Institute (www.som.gu.se/english) in 2004. Addresses were collected from the National Register, which includes all legal residents of Sweden; 1,774 individuals (64 percent) responded (from 267 of the 290 municipalities). The respondents are representative of the Swedish adult population (Nilsson, 2005). Data from Statistics Sweden (www.scb.se) on municipal income tax rates in 2004 is also used. The dependent variable in the analysis is people's attitudes toward the municipal income tax, shown in Table 1. More specifically, people are asked the following question: "Do you think that the following taxes should be increased or decreased?". Attitudes toward the corporate income tax and the real estate tax are shown for comparison. The corporate income tax appears to be the most popular, though more people favor decreasing than increasing it, and the real estate tax is 2

clearly the least popular.   Most people seem to care about the taxes they pay. Half the respondents favor decreasing the municipal income tax, and 8 percent favor decreasing it a lot, while This website stores data such as only 5 percent favor increasing it (a little). Nevertheless, 82 percent are fairly satisfied cookies to enable essential site with it and favor no or small change. In comparison, 21 percent favor decreasing the functionality, as well as marketing, corporate income tax a lot or a little, and 71 percent favor decreasing the real estate personalization, and analytics. You l ot or a little. Thus, more people are aatt least somewhat satisfied with the may change your settings attax any atime or accept the default settings. municipal income tax. 3  Privacy Policy Marketing Personalization

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 The real estate tax was abolished in 2008 and replaced with a municipal fee.  This is also true when compared to all eleven taxes in the survey (Hammar et al., 2009).

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Attitudes toward municipal income tax rates in Sweden

The actual municipal tax rates faced by the respondents (Table 2) varied from 28.9  percent (in Kävlinge) to 34.04 percent (in Dals-Ed). The mean was 31.58 percent, and the median 31.74 percent, indicating a distribution skewed very slightly to the right. The three municipalities with the most inhabitants had rates of 30.35 pe rcent (Stockholm), 31.8 percent (Gothenburg), and 31.23 percent (Malmö), while the three with the fewest inhabitants all had a slightly higher rate of 32.6 percent (Bjurholm, Sorsele and Dorotea).

Table 1: Swedish tax attitudes, 2004, in percent Abolish/ decrease a lot

Decrease a little

Keep unchanged

Increase a little

Increase a lot

No opinion

No response

Municipal income tax Corporate tax

8

42

35

5

0

8

2

6

15

29

11

2

32

5

Real estate

39

32

16

1

0

10

1

tax No. of obs. 1,683

Table 2: Swedish municipal income inco me tax rates, 2004, in percent Minimum 28.90

10th percentile 30.35

25th percentile 30.93

Median 31.74

75th percentile 32.20

90th percentile 32.70

Maximum 34.04

Table 3 provides summary statistics for the background characteristics for respondents that expressed an opinion about the municipal tax rate. There are approximately equal numbers of men and women; 21 percent were 65 or older; 32 percent were on a low income; 29 percent pe rcent had ha d studied at uuniversity; niversity; 14 percent pe rcent had preschoo preschooll children; 28  percent worked in the municipal sector; 35 ppercent ercent lived in or near one of the three largest cities; one-third regarded themselves as sympathetic to the political left, oneThis website stores data such as third to the right; 62 percent regularly read a morning newspaper; 46 percent reported cookies to enable essential site fairly good or very good public services in their municipality; and 34 percent trusted functionality, as well as marketing, their local politicians. personalization, and analytics. You may change your settings at any time or accept the default settings.

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Attitudes toward municipal income tax rates in Sweden

Table 3: Summary statistics, background characteristics Variable

Description

Mean

Standard

Percentage

Percentage

Obs.

Women Old (65-85) Children Low income

=1 if woman =1 if 65-85 years old =1 if child 0-6 in household =1 if household yearly income is less than 11k euro (single adult) or 22k euro (two or more) =1 if household yearly income exceeds 43k euro (single adult) or 65k euro (two or more) =1 if no high school degree

0.478 0.214 0.138 0.310

deviation 0.500 0.410 0.345 0.463

0 52.2 78.6 86.2 69.0

1 47.8 21.4 13.8 31.0

1,554 1,554 1,554 1,475

0.193

0.395

80.7

19.3

1,475

0.362

0.481

63.8

36.2

1,554

=1 if studies at university or for a university degree =1 if working in municipal sector

0.293

0.455

70.7

29.3

1,536

0.280

0.449

72.0

28.0

1,357

0.631

0.483

36.9

63.1

1,543

Left

=1 if read morning newspaper 6-7 days/week =1 if 1 or 2 on a political scale 1-5

0.340

0.474

66.0

34.0

1,495

Right

=1 if 4 or 5 on a political scale 1-5

0.344

0.475

65.6

34.4

1,495

Good services Low knowledge Low trust

=1 if services in municipality fairly good or very good, last 12 months =1 if 1-3 on a scale 1-10

0.463

0.500

53.7

46.3

1,404

0.186

0.389

81.4

18.6

1,519

=1 if low trust for municipal board

0.350

0.477

65.0

35.0

1,520

Tax base

per capita as percentage of national mean

99.215

14.629

1,552

3.889

4.705

1,552

0.351

0.477

0.569

0.713

1,552

0.297

0.387

1,549

0.087

0.283

High income

Low education High education Municipal employee Newspaper

Grants

intergovernmental grants per capita in thousands SEK Urban =1 if living in one of 3 largest city This website stores data such as regions cookies to enable site Changeessential '03 percentage point change in functionality, as well as marketing, municipal taxrate 2002-2003 personalization, and analytics. You Change '04 percentage point change in may change your settings at any time municipal taxrate 2003-2004 or accept the default settings. Moved =1 if moved to the municipality less than 3 years ago

64.9

91.3

35.1

8.7

1,552

1,532

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Attitudes toward municipal income tax rates in Sweden

Table 4 shows the distributions of preferences toward the municipal income tax by the independent variables, and there are some clear patterns in the data. A Wilcoxon ranksum test showed that the differences between men and women, young and old, people with preschool children and those without, and people who lived in cities and those who did not are not statistically significant. Those with high or low income are more likely to favor decreasing the tax (and those with middle income are more likely to favor increasing it); the difference between low and middle income earners is statistically significant at the 1% level. Those with low education are much more likely to favor decreasing the tax (and less willing to increase it). Similarly, private sector employees are much more likely to favor decreasing the tax (and less likely to favor increasing it). Table 4: Distribution of Swedish municipal income tax preferences, in percent Abolish/ decrease a lot 8.4 8.4 8.3 9.9 6.5 10.3 8.1 7.6 7.1 10.5 6.5 9.6 8.3

Decrease a little 42.7 40.0 45.3 35.9 44.9 42.0 42.8 46.5 43.3 41.3 39.0 44.1 38.3

Keep unchanged 35.3 35.7 34.9 36.2 32.0 36.6 35.1 35.0 39.2 30.0 40.9 31.2 39.8

Increase a little 5.2 3.9 6.4 2.1 4.8 5.8 5.1 4.3 6.1 4.8 6.5 4.7 6.0

Increase a lot 0.1 0.1 0.1 0.0 0.3 0.0 0.1 0.0 0.0 0.4 0.0 0.2 0.3

Full sample Women Men Young (18-30) Old (65-85) Children No children High income Middle income Low income High education Low education Municipal employee Private 8.8 46.5 33.3 5.0 0.1 employee Newspaper 6.6 42.8 37.8 6.0 0.1 No newspaper 11.3 42.5 31.7 3.8 0.2 Left 4.8 35.3 43.1 9.2 0.0 Right 9.7 52.0 30.5 2.7 0.0 Good services 6.5 41.6 39.4 5.9 0.3 Bad services 11.8 48.4 27.5 5.2 0.0 High trust 6.3 38.1 44.4 7.6 0.0 Low trust 10.7 47.0 30.7 5.6 0.2 This website stores data such as High knowledge 7.1 42.1 40.5 6.4 0.0 cookies to enable essential site Low knowledge 13.3 43.5 23.5 4.3 0.3 functionality, as well as marketing, Urbanand region 46.2 32.6 5.4 0.2 personalization, analytics.8.4 You urban 8.4time 42.2 35.6 5.5 0.1 may changeNot your settings at any region or accept the default settings. High municipal 9.6 44.0 35.0 3.0 0.0 tax Low municipal 9.7 39.5 36.8 6.1 0.0 Privacy Policy tax Marketing Bold characters indicate a statistically significant difference between the pairs (at least at 10%).

No opinion 8.3 11.8 4.9 15.9 11.5 5.4 8.8 6.6 4.4 13.1 7.1 10.3 7.5 6.4 6.8 10.5 7.6 5.1 6.3 7.2 3.6 5.8 4.0 15.1 7.3 8.2

8.4 7.9

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As expected, people supporting the political left are much less likely to favor decreasing the tax (and more likely to favor increasing it) than are those supporting the right. Regular newspaper readers and those self-reporting a high level of knowledge about society are also less likely than others to favor decreasing the tax (and more likely to favor increas increasing ing it). Those reportin reportingg good publ ic serv services ices in their municipality and those trusting their municipal politicians are less likely to favor decreasing the tax. All these differences are statistically significant according to the Wilcoxon rank-sum test. Finally, those living in low-tax municipalities (the 10 percent of the sample paying the lowest tax rate) are less likely than the 10 percent living in high-tax municipalities to favor decreasing the tax (and more likely l ikely to favor increasing it). However, this difference is not statistically st atistically significant. 3. EMPIRICAL STRATEGY AND THEORETICAL BACKGROUND  3.1 Empirical strategy

Following a general choice framework developed by Bergstrom et al. (1982) and used in a similar context by Bergstrom et al. (1988), Ahlin and Johansson (2001), and Ågren et al. (2007), I assume that an individual's preferred municipal income tax rate is given by t i =  β 0  +  x i β + ε i , ∗

(1)

where xi is a vector of variables explaining the unobserved preferred tax tare (t i*), and εi  is an independently and identically distributed random error term. We do not observe ti* directly, but we assume that an individual expresses dissatisfaction with the actual tax rate (ti) if it deviates from her preferred level with a sufficiently large amount (formalized by the parameters δ<0 and γ<0). Individuals will respond “abolish/decrease a lot” if ti*<ti-δ-γ  “decrease a little” if ti*<ti-δ “keep unchanged” if ti-δ≤ ti*≤ ti+δ “increase a little” if ti*>ti+δ “increase a lot” if t i*>ti+δ-γ. For example, the probability that individual i will choose response alternative “keep unchanged” is the probability that the unobserved preferred tax rate falls in between This website stores data such theascut-points ti-δ and ti+δ. Thus, the variable is inherently ordered but the distances cookies to enable essential site  between the categories (δ) are unknown. Assuming that ε i are normally distributed we functionality, as well as marketing, can estimate the model using ordered probit estimation (see e.g., Bergstrom et al., personalization, and analytics. You 1982, 1988).4  may change your settings at any time or accept the default settings.

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  If we instead assume that the error has a logistic distribution ordered logit regressions would be  preferred.

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Attitudes toward municipal income tax rates in Sweden

3.2 Theoretical background

If location of residence is exogenous and respondents are randomly distributed over municipalities, we would expect those paying higher taxes to be more supportive of decreasing tax rates than those paying lower taxes. In a Tiebout setting, where location is a person whotodoes not like(Tiebout, the tax rate in her municipality to endogenous, one with a tax rate more her liking 1956). That is, some ofcould thosemove who  prefer low tax rates might already have moved to lower tax municipalities. If this “vote-with-your-feet” mechanism worked perfectly, everyone would be satisfied with the municipal taxes that they pay, but, given (among other things) that people are not  perfectly mobile and that there are a re not enough different municipalities to choose from, we should not expect Tiebout sorting to work perfectly. Studying how movement is related to local public services, Dahlbe Dahlberg and Fredriksson (2001) do not find strong evidence of Tiebout sorting in Sweden.5 In light of this we expect that people living in high tax municipalities should be more willing to decrease the tax and individuals living in low tax municipalities should be more willing to increase the tax. In studying the relationship between the municipal tax rate that people face and their willingness to change that same tax we include a number of control variables that have  been argued to be important for tax preferences. Families with incomes below the mean, bythat t heredistribute standard Meltzer-Richard argument, have antoincentive to favor  policies i ncome from families income with would high incomes families with low incomes (Meltzer and Richard, 1981); we thus expect both high income earners to be more willing to decrease the tax and low income earners to be more willing to decrease the tax, as compared to middle income earners. Simple theoretical models of demand for local public goods imply that personal income, intergovernmental grants, and tax base should affect demand for local public goods and thus also tax preferences (Bergstrom et al., 1982; Ahlin and Johansson, 2001). Hess and Orphanides (1996) construct a model showing that families with more children prefer higher taxes than others, due to them benefiting more from government spending. Edlund (2003) argues that social class should also be an important explanatory variable, as a self-interest effect. For example, manual workers tend to have a higher risk of unemployment and thus a greater need for public support than do highly educated workers. Since women may be more dependent on the public sector when it comes to employment, and social Edlund (2003) arguespreferences that they should be less likely to benefits, promote lower taxes.services, Empirical studies of policy typically find that women are more supportive of activist government policies (e.g., Svallfors, 1997), This website stores data such as as well as income redistribution and assistance for the poor (Alesina and La cookies to enable essential site Ferrara, 2005). Alvarez and McCaffery (2003) find that while women want to use a functionality, as well as marketing,  potential budget surplus on child care (or express no opinion on how to spend the personalization, and analytics. You men want to spend the surplus on tax reductions. Furthermore, Courant et al. surplus), may change your settings at(1979) any time argue that public employees should have preferences for more public spending or accept the default settings. and should thus favor higher taxes. In line with the self-interest assumptions, municipal employees are more dependent on the municipal sector, they should be less likely to promote a decrease in the municipal income tax. Relatedly, elderly Privacy Policy individuals benefit more from public spending, than do t hose of working age, and should thus also demand more municipal spending, and thus higher taxes. Marketing Personalization

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 See Dowding et al., (1994) for a review of the empirical literature on Tiebout sorting.

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4. EMPIRICAL RESULTS  4.1 Factors related to tax preferences

The aim of this section is to assess what determines people's attitudes toward the municipal labor income tax and how attitudes are affected by the taxes people face. Following the discussion in Section 3.1, ordered or dered probit regressions are used to analyze attitudes to the municipal tax rate, with willingness to change it ranging from 1 for "abolish/ decrease a lot" to 5 for "increase a lot" as dependent variable. We run three models, including progressively more explanatory variables. The idea is that the variables included in the latter specifications could be regarded as less exogenous since they are attitude variables, and a successive introduction of variables thus helps us spot odd events. In all three models we hold the number of observations constant. Table 5 shows the estimated coefficients, and Table 6 shows the marginal effects for specification 3. Specification 1 focuses on a few socio-demographic variables, chosen following the discussion above. The municipal tax rate itself has a n egative but statistically insignificant effect. Low income has a st atistically significant negative effect, indicating a tendency for those with low income to favor reduced municipal tax rates. The same is true for high-income earners. That low-income earners would like to cut the tax rate is not in line with the standard Meltzer and Richard (1981) argument. One  possible reason for this may be that the municipal income ttax ax is not progressive, thus low-income earners prefer increases in other taxes instead. These results are also similar to the results re sults in Edlund (1999) and Hammar et al. al . (2009). Having at least some higher education (as compared to only high school) has a statistically significant positive effect (while having low education has a negative but not statistically significant effect), perhaps indicating that these respondents do not overestimate the taxes they pay. Gender, being old, and having preschool children do not have statistically significant effects, which does not support the previous theoretical arguments indicating that females, the elderly, and families with children should be more supportive of taxes used to finance public services, due to self-interest. The tax base in the municipality where the respondent lived and the intergovernmental grants to that municipality are not statistically significant. Specification 2 includes two new variables expected to affect preferences regarding municipal taxes: whether respondents are regular newspaper readers, and whether they are municipal employees. Regular newspaper readers are more supportive of municipal taxes, perhaps because they are better informed about the taxes they pay This website stores data such as and what the tax payments are used for, as proposed by Gemmell et al. (2004). cookies to enable essential site Municipal employees also tend to support municipal taxes; this relation is however not functionality, as well as marketing, statistically significant. personalization, and analytics. You may change your settings atSpecification any time or accept the default settings.

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3 adds five subjective variables: supporting the political left, or the  political right; perceiving good municipal services; distrust in local politicians; and claiming to have a low level of knowledge about society. Pseudo R 2  is higher with these new variables included; also a link test for model specification implies that this specification fits the data better than the other two specifications.

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Table 5: Estimation of attitudes toward municipal income tax, ordered probit Tax rate

Tax base Grants Women Old (65-85) Children Low income High income Low education High education Municipal employee Newspaper Left Right Good services Low trust Low knowledge

(1) -0.054 (0.039)

(2) -0.044 (0.038)

(3) -0.046 (0.040)

-0.007 (0.005) -0.012 (0.015) -0.01 0 -0.010 (0.061) 0.129 (0.088) -0.019 (0.113) -0.209** (0.082) -0.176* (0.093) -0.069 (0.086) 0.242*** (0.079)

-0.006 (0.005) -0.012 (0.015) -0.036 (0.061) 0.080 (0.092) 0.000 (0.115) -0.180** (0.080) -0.190** (0.096) -0.077 (0.085) 0.218*** (0.079) 0.091 (0.075) 0.211** (0.086)

-0.008 (0.005) -0.019 (0.014) -0.034 (0.061) 0.117 (0.094) -0.004 (0.115) -0.159** (0.078) -0.124 (0.096) -0.113 (0.093) 0.212** (0.085) 0.026 (0.077) 0.235*** (0.090) 0.312*** (0.084) -0.277*** (0.087) 0.139* (0.071) -0.047 (0.073) -0.259***

(0.092) Observations 1,093 1,093 1,093 Municipalities 242 242 242 This website stores data such as Log likelihood -1,192 -1,187 -1,154 cookies to enable essential site 2 Pseudo R   0.011 0.015 0.043 functionality, as well as marketing, Dependent variable ranges from 1 for "abolish/decrease a lot" to 5 for "increase a lot." personalization, and analytics. You Standard errors in parentheses. Standard errors are clustered at the municipalities. *** may change your settings at any time p<0.01, ** p<0.05, * p<0.1.

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The coefficients on political views (left and right) are highly significant, as is the coefficient on l ow level of knowledge about society. The coefficient on p erceived good municipal services is less significant, while that on the level of distrust is not statistically significant at conventional levels. Reverse causality may be a p roblem when it comes to the variables on political views, though not including these variables does not change the significance levels and marginal effects of the other variables very

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much. An explanation for why tax base and intergovernmental grants do no t have statistically significant effects could be that people do not know or assess this information when it comes to their preferences for the municipal income tax rate. While most of the previous coefficients (and their significance levels) do not change much in the three different specifications, the coefficient on h igh income is now insignificant. Apparently, after controlling for political views and level of knowledge about society, perceptions about public services, and newspaper readership, the pure effect of income on s upport for municipal taxes becomes less pronounced. This implies that it is not high income per se, but rather political views and knowledge that is important. As in the other specifications, gender, being old, and having preschool children have no statistically significant effects.

Table 6: Marginal effects based on ordered probit estimations of attitudes toward municipal income tax Abolish/ decrease a lot Tax rate 0.006 Tax base 0.001 Grants 0.002 Women 0.004 Old (65-85) -0.014 Children -0.001 Low income 0.022* High income 0.017 Low education 0.015 Higher education -0.026*** Municipal employee -0.003 Newspaper -0.032*** Left -0.038*** Right 0.038*** Good services -0.018* Low trust 0.006

Decrease some 0.012 0.002 0.005 0.009 -0.032 0.001 0.040** 0.032 0.029 -0.058** -0.007 -0.060*** -0.085*** -0.08 5*** 0.070*** -0.037* 0.012

Keep unchanged -0.013 -0.002 -0.005 -0.010 0.033 -0.001 -0.046* -0.036 -0.033 0.060** 0.007 0.069*** 0.088*** -0.081*** 0.040* -0.014

Increase some -0.005 -0.001 -0.002 -0.003 0.013 -0.000 -0.015** -0.012 -0.011 0.022** 0.003 0.022*** 0.034*** -0.027*** 0.014* -0.005

Low knowledge 0.038** 0.062*** -0.077*** -0.023*** Marginal effects for continuous variables and first difference for dummies following Specification 3, Table 5. Increase a lot not presented due to few observations. This website stores data such as *** p<0.01, ** p<0.05, * p<0.1.

cookies to enable essential site functionality, as well as marketing, personalization, and analytics. You in this specification, the coefficient on the tax rate is statistically may change your settings atAlso any time or accept the default settings. Thus, the tax rate that people actually face in their municipality does not

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insignificant. seem to have an effect on their level of support for municipal taxes in this specification. But what drives this result? As noted above, high education and regularly reading a newspaper are associated with living in a low tax municipality. Excluding both these variables  High education  and  Newspaper ) turns the coefficient on actual tax rate statistically ( High significant at the 10 percent level. Another variable for indicating media consumption, whether the respondent listens to or watches local news broadcasts regularly, is not associated with whether the respondent lives in a low-tax municipality. Including this

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variable as an explanatory variable in place of  Newspaper   shows that it has no explanatory power for attitudes to the tax rate. Neither does it change the significance levels or marginal effects of the other variables very much. 6 This indicates that it is not information per se that is of importance for tax preferences. The results regarding the effect of the actual tax rate are clearly sensitive to model specification; only in some specifications is it statistically significantly associated with tax attitudes. In the next section, the possible effect of the actual municipal tax on attitudes toward this tax will be investigated further. 4.2 Tiebout bias

Why does the actual tax rate not seem to have a clearer effect on respondent attitudes toward municipal taxes? It is possible that some kind of Tiebout effect is at work (Tiebout, 1956). The municipal labor income tax is the only tax that varies across municipalities in Sweden and respondents might be more satisfied with this tax  because of the possibility of moving to a municipality with a tax rate more to their liking. An indication of this is that the municipal income tax is the tax that most  people are satisfied with according to the data used in tthis his study (as we saw in Table 1). If location of residence is exogenous and respondents are randomly distributed over municipalities, we would expect those paying higher taxes to be more supportive of decreasing tax rates than those paying lower taxes. In a Tiebout setting, where location is endogenous, a person who does not like the tax rate in her municipality could move to one with a tax rate more to her liking. In this case, the estimated coefficient of the effect of tax rates on desire to change them would be underestimated in our regressions. That is, some of those who prefer low tax rates might already have moved to lower tax municipalities. The more their choice of residence has already been affected by the municipal tax rate, the smaller the coefficient for the effect of the tax rate. We could call this a Tiebout bias. Following Rubinfield et al. (1987) and Ahlin and Johansson (2000), the problem can be described in the following way. We know from before (equation 1) that an individual's preferred municipal tax rate is given by t i =  β 0 +    x i β + ε i (2) , ∗

where xi is a vector of variables explaining the unobserved preferred tax tare (t i*), and

This website stores data such εi as is an independently and identically distributed random error term. Not all cookies to enable essential site individuals in a municipality will have the tax rate they prefer because they may have functionality, as well as marketing, moved there (or not moved away) based on other factors. The difference between the personalization, and analytics. You rate they pay (t ) and their preferred tax rate (t *) can be expressed as actual i i may change your settings at any time or accept the default settings.   ∗   0  + x i γ + u i   ti − ti = γ

(3)

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6

 These results are available upon request.

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Variables in (3) include variables in (2); for example, income might affect both the  preferred tax rate and mobility. There can also be variables in (3) not affecting the  preferred tax rate; i.e. some β’s and γ’s might be zero. If ε i and ti are correlated there is a Tiebout bias; the preferred tax rate affects the choice of residential municipality. That is, if the choice of which municipality to reside in is influenced by the preferred tax rate we will underestimate the actual relation between the actual and preferred tax rate. As proposed by Rubinfield et al. (1987), instrumental variable estimation might correct the bias due to the endogeneity problem. Instrumental variable estimation is conducted via a two-step procedure where the endogenous variable is regressed on the instrumental variables and the exogenous variables from the original estimation. In the second stage, the regression of interest is estimated as usual, except that in this stage, the endogenous variable is replaced with the predicted values from the first stage regression. We use four variables assumed to affect the preference municipality mismatch but not the preferred tax rate; the choice of variables follows Rubinfield et al. (1987) and Ahlin and Johansson (2000). The idea is that these variables should explain the tax rate that an individual faces but not the tax rate that she actually prefers. The first variable indicates individual lives in of the three major urban regions in Sweden (Urbanwhether ), and isthe meant to measure theone availability of municipality choice. There are multiple municipalities within commuting distance in each region, and this should decrease the mismatch, since it is possible to choose from several municipalities with different tax rates. By the same token, a variable indicating a recent move is included ( Moved   Moved ), ), since more recent movers should be more satisfied with the tax rate in the municipality they have chosen to move to. The other two variables measure the change in the municipal tax rate from 2002 to 2003, or from 2003 to 2004 (Change '03  and Change '04). Since moving is costly, people might choose not to move even though the tax rate has recently changed from their preferred level. A large change in the tax rate would, at least if unexpected, make the mismatch larger. Using these variables (Urban, Moved , Change '03, and Change '04) as instruments for the actual tax rate, we can test for a potential Tiebout bias and, in the case of a bias, improve the estimation theinstrumental causal effectvariable of the regressions, actual municipal on the attitudes towards this tax.ofThe as welltaxasrate an ordered  probit comparison, are presented in Table 7.

This website stores data such as cookies to enable essential site The dependent variable in the first step is the actual tax rate in the municipality where functionality, as well as marketing, the respondent lives. In Table 7, Panel B we can see that the municipal tax rate is personalization, and analytics. You indeed correlated with the chosen instruments (which are supposed to affect municipal may change your settings at any time choice but not the preferred tax rate). 7 This is supported by the Cragg-Donald statistic, or accept the default settings.

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7

 People living in urban urb an regions tend to face higher tax rates, while those who have moved recently live in municipalities with lower tax rates. When it comes co mes to municipalities that recently changed th their eir tax rates, the effects go in different directions; municipalities that increased their tax rates in 2003 tend to have lower tax rates than others, while those who increased their tax rates in 2004 instead tend to have higher tax rates than others. The reason for this is that municipalities that increased their tax rates in

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which indicates that the instruments are not weak. This implies that the instruments are good predictors of the actual tax rate and that the predicted values have enough variation to be used as instruments. The Sargan test suggests that the instruments are valid. This implies that the instruments do not seem to affect tax rate preferences directly, but only the mismatch, as we have assumed. Table 7: Testing for Tiebout bias Dependent variable: attitudes towards municipal income tax rate Oprobit IV 1 IV 2 Panel A: Second stage results Tax rate

Urban

-0.046 (0.026)

-0.233** (0.105)

-0.217** (0.104)

IV 3

-0.210** (0.069)

Panel B: First stage results for tax rate 0.052 (0.169) -0.419*** (0.137) 0.742*** (0.164)

0.051 (0.169) Change '03 -0.422*** -0.405*** (0.138) (0.141) Change '04 0.741*** 0.739*** (0.166) (0.165) Moved -0.076 (0.107) Observations 1,093 1,085 1,085 1,085 Hausman p-value 0.110 0.145 0.156 Cragg-Don. F-value 62.45 46.40 92.12 Sargan p-value 0.359 0.145 0.495 Estimated with 2SLS. Only results for tax rate and instruments presented. Standard errors clustered at the municipal level in partenthesis. The Hausman-, Cragg_Donald-, and Sargan tests were conducted using a linear version of the IV-procedure. *** p<0.01, ** p<0.05, * p<0.1.

The dependent variable in the second step is the level of support for municipal taxes, ranging from 1 for "abolish/decrease a l ot" to 5 for "increase a l ot." This step was conducted using ordered probit regressions. Here the tax rate is replaced with the  predicted values of the tax rate from the first stage regression. The second-stage results show that (instrumented) tax rate has a statistically significant negative effect on tax attitudes (Table 7, Panel A). 8  This website stores data such as Using the Hausman test, we can test whether the tax rate is endogenous in our cookies to enable essential site estimations; i.e., whether the tax rate is correlated with the error term. The Hausman functionality, as well as marketing, testYou does not suggest that the IV-specification is preferable for any of the tested personalization, and analytics. of instruments. That is, the null that the municipal tax rate is exogenous may change your settings atcombinations any time is not rejected (the p-value ranges from 0.110 to 0.156 in the three specifications or accept the default settings.

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 presented in Table 7). This is true for all possible combinations of our four instruments. The specifications presented in Table 7 a re closest to passing the 2003 increased it from a relatively low level, while this is not the case for municipalities that increased their rates in 2004. 8  A modified Breuch-Pagan test (not presented) suggests that heteroskedastic heteroskedasticity ity is not a problem, hence I do not use robust standard errors (although doing so does not change the results).

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Hausman test. Thus, the results of the test are robust to the inclusion of different instruments. This suggests that a Tiebout bias is not a problem in this setting, yet the results from  previous studies have been sensitive to the choice of instrumental variables (Ahlin and Johansson, 2000). The result of the Hausman test should therefore be accepted only with some caution. Even though it is not possible to reject the null of no Tiebout bias, when the municipal tax rate is instrumented for, the coefficients get considerably larger (and statistically significant at the 5 percent level) than in the non-instrumented ordered probit counterpart (see second stage in Table 7). This is at least an indication that some kind of Tiebout sorting may be going on, a nd that actual tax rates may matter for attitudes. From descriptive statistics we know that the highly educated and  people regularly reading a newspaper − two factors related to not wanting to decrease the tax rate − tend to live in municipalities with lower taxes. This is what we would expect if these people have moved to municipalities with tax rates to their liking. However, for other variables which are important for tax preferences (political affiliation, satisfaction with municipal services, and income) there is no tendency for these groups to reside in either high- or low-tax municipalities. But why is the case for Tiebout not sorting stronger? One reason could be that people are not aware of in thea highdifferent tax rates in nearby municipalities, do not know whether they live or low-tax municipality. Such systematicormisconceptions about key fiscal parameters are called fiscal illusion (Oates, 1988). In this case, their desire to change the municipal tax rate might depend, to some extent, on misperceptions of how high their tax rate actually is (see e.g.Gemmell et al., 2004 for a similar argument). An indication of this is that people have unrealistic expectations about taxes and government budgets: about 64 percent of the respondents would like to decrease their tax rate, while only 27 p ercent would like to decrease the public services provided by the public sector financed by the taxes. That knowledge about taxes in the Swedish general population is sparse is also supported by Sandaji and Wallace (2010), who find that people underestimate the share of an average worker’s income that is transferred to the public sector. Another reason why people might not move as a result of differences in municipal tax rates is "editing," whereby people rule out less important factors in their decision-making (Kahneman and Tversky, 1979); the municipal tax rate may be one such less important factor. A status quo bias, in which prefer the tax rate they have John to a tax rate(1995) that they do not may also beindividuals a possibility (Kahneman et al., 1991). et al. found that,have, although there is some support for Tiebout sorting, there are generally more important factors to This website stores data such as consider when deciding where to live, such as buying a first home, and job cookies to enable essential site opportunities. functionality, as well as marketing, personalization, and analytics. You  CONCLUSION may change5.your settings at  any time or accept the default settings.

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Coming back to the questions in the opening paragraph: Is it th e case that people living in high-tax municipalities are more willing to decrease the tax and individuals living in low-tax municipalities are more willing to increase the tax? Or, following the Tiebout (1956) argument, do people vote with their feet − by moving − to pay taxes that accord with their preferences? People in high-tax municipalities are to some extent more likely to want lower tax rates, and people in low-tax communities are to some extent more likely to want higher tax rates. While it is tempting to interpret this

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modest effect of the actual tax rate on tax preferences as a Tiebout effect − i.e., people move to municipalities with their preferred tax rate and do not like to change the tax − the evidence for this is not very strong. Another possible explanation is that people do not always know their actual tax rates or how they compare to tax rates in nearby municipalities, as suggested by previous work showing that knowledge about taxes tend to be low in the general public (Gemmell et al., 2004). Since better informed  people may be less likely to want to decrease tax rates, measures to increase public knowledge about taxes may be important for the legitimacy of income tax collection. But what other factors are important for municipal tax rate preferences? Possible selfinterest variables, such as being a municipal employee, having young children, or  being 65 or older, do not seem to be important in determining people's desire to change tax rates. This is in line with survey evidence indicating that voting and  political preferences are not only driven by self-interest (e.g., Carlsson and JohanssonStenman 2010). Those with low or high income (as compared to middle-income earners) are more likely to want to decrease their tax rates, however. That low-income earners would like to cut the tax rate is not in line with the standard Meltzer and Richard (1981) argument. One possible reason for this might be that the municipal income tax is not progressive, thus low-income earners prefer increases in other taxes instead. Unsurprisingly, political views seem to be important in determining people's tax  preferences: those who support the political ri right ght are more llikely ikely to want to decrease tax rates, while those who support the left are less likely. Of course, the self-interest factors (as having children or being a municipal employee) might affect political views, rather than tax preferences directly. Also, reverse causality may be a problem when it comes to including i ncluding the variables on political views, though not including these variables does not change the results regarding the other variables to any great extent (as demonstrated by the successive introduction of variables in Specifications 1-3). To further address the questions concerning what is important for people's tax  preferences, it would be interesting to ask whether people know their actual tax ra rates tes and whether they know what their tax payments are used for. This would make it  possible to ascertain whether people who know what their taxes are used for have different preferences regarding tax rates to those who do not.

This website data such as R stores EFERENCES EFERENCES   cookies to enable essential site functionality, as well as marketing, Ågren, H., personalization, and analytics. You to those of may change your settings at any time 137-62. or accept the default settings.

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Dahlberg, M., and Mörk, E. (2007). Do politicians' preferences correspond the voters? an investigation of political representation. Public Choice, 130:

Ahlin, Å. and Johansson, E. (2000). Demand for local public schooling: Another brick in the wall. Working Paper 2000:12, Uppsala University. Ahlin, Å. and Johansson, E. (2001). Individual demand for local public schooling: Evidence from Swedish survey data. International Tax and Public Finance, 8: 331-51.

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Alesina, A. and La Ferrara, E. (2005). Preferences for redistribution in the land of opportunities. Journal of Public Economics, 89: 897-931. Alvarez, M. and McCaffery, E. (2003). Are there sex differences in fiscal political  preferences? Political Research Quarterly, 56: 56: 5-17. Andersson, D.,ekonomi. Fransson,Stockholm, A., and Kainelainen, en läsebok om BILDA. A. (2003). Marknaden och välfärden: Bergstrom, T., Roberts, J., Rubinfeld, D., and Shapiro, P. (1988). A test for efficiency in the supply of public education. Journal of Public Economics, 35: 289-307. Bergstrom, T., Rubinfeld, D., and Shapiro, P. (1982). Micro-based estimates of demand functions for local school expenditures. Econometrica, 50: 1183-205. Carlsson, F. and Johansson-Stenman, O. (2010). Why do You Vote and Vote as You do?, Kyklos. 63: 495–515. Courant, P. N., Gramlich, E. M., and Rubinfeld, D. L. (1979). Public employee market  power and the level of government spending. American Economic Review, 69: 80617. Dahlberg, M.Paper and Fredriksson, P. (2001). Migration public services. Working 12, Uppsala University.and local Available online: http://www.nek.uu.se/pdf/2001wp12.pdf. David, E. (1961). Public Preferences and the Tax Structure: An Examination of Factors Related to State and Local Tax Preferences. Un-published Ph.D. thesis, The University of Michigan. Dowding, K., John, P., and Biggs, S. (1994). Tiebout: A survey of the empirical literature. Urban Studies, 31: 767–797. Edlund, J. (1999). Progressive taxation farewell? Attitudes to income redistribution and taxation in Sweden, Great Britain and the United States. In Svallfors, S. and Taylor-Gooby, P., editors, The end of the welfare state? Public responses to state retrenchment. London: Routledge. Edlund, (2000).23: Public attitudes towards taxation: Sweden 1981-1997. Scandinavian Political J.Studies, 37-65. This website stores data such as Edlund, J. (2003). Attitudes towards taxation: ignorant and incoherent. Scandinavian cookies to enable essential site Political Studies, 26: 145-67. functionality, as well as marketing, Gemmell, N., Morrissey, O., and Pinar, A. (2004). Tax perceptions and preferences personalization, and analytics. You may change your settings atover any time tax structure in the t he United Kingdom. Economic Journal, 114: 117-38. or accept the default settings.

Hammar, H., Jagers, S. C., and Nordblom, K. (2009). Attitudes towards tax levels: A multi-tax comparison. Fiscal Studies, 29: 523-43.

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John, P., Dowding, K., and Biggs, S. (1995). Residential mobility in London: A micro-level test of the behavioural assumptions of the Tiebout model. British Journal of Political Science, 25: 379-97. Kahneman, D., Knetsch, J., and Thaler, R. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. Journal of Economic Perspectives, 5: 193-206. Kahneman, D. and Tversky, A. (1979). Prospect theory: An analysis of decision deci sion under risk. Econometrica, 47: 263-92. Kumlin, S. (2007). Overloaded or undermined: European welfare states in the face of  performance dissatisfaction. In Svallfors, S., editor, The Political Sociology of the Welfare State. Stanford, CA: Stanford University Press.  Nilsson, Å. (2005). Den nationella SOM-undersök SOM-undersökningen ningen 2004. IInn Holmberg, S. and Weibull, L., editors, Lyckan kommer, lyckan går, SOM-rapport nr. 36. SOMinstitutet, Göteborg University. Oates, W. E. (1988). On the nature and measurement of fiscal illusion: ill usion: A survey. In G. Bren-nan, S. Grewel, & P. Groenwegen (Eds.), Taxation and Fiscal Federalism:  Essays in Ho-nour of Russel Russel Mathews. Sydney: ANU Press. OECD (2005). Revenue Statistics 1965-2004. OECD Publishing. Meltzer, A. and Richard, S. (1981). A rational theory of the size of governm government. ent. The Journal of Political Economy, 89: 914-27. Roberts, M. Hite, P. and Bradley, C. (1994). Understanding attitudes toward  progressive taxation. Public Opinion Opinion Quarterly, 58: 165165-90. 90. Rubinfield, D., Shapiro, P., and Roberts, J. (1987). Tiebout bias and the demand for local public schooling. Review of Economics and Statistics, 69: 426-37. Sandaji, T., and Wallace, B. (2010). Fiscal illusion and fiscal obfuscation: An empirical study of tax perception in Sweden. IFN Working Paper No. 837. Available online: http://www.ifn.se/wfiles/wp http://www.ifn.se/wfiles/wp/wp837.pdf. /wp837.pdf. Swedish Tax Agency (2006). Taxes in Sweden 2006. Technical report. Available online: http://www.skatteverket.se/download/18.233f91f7126007 http://www.skatteverket.se/dow nload/18.233f91f71260075abe8800097316/10407.pd 5abe8800097316/10407.pdff This website stores data such as Svallfors, S. (1997). Worlds of welfare and attitudes to redistribution: A comparison cookies to enable essential site of eight western nations. European Sociological Review 13: 283-304. functionality, as well as marketing, personalization, and analytics. You C. (1956). A pure theory of local expenditures. Journal of Political Economy, Tiebout, may change your settings at64: any416-24 time or accept the default settings.

Wahl, I. Muehlbacher, S. and Kirchler, E. (2010). The Impact of Voting on T ax Payments. Kyklos, 63: 144-58.

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APPENDIX - TAXES IN SWEDEN 

In 2004 t he tax to GDP ratio in Sweden was 50.3 percent; the highest ratio in the world (Swedish Tax Agency, 2006). This is almost 15 percentage points higher than the OECD average. Note that many transfers are taxed in Sweden compared to other countries, if this is taken into account the tax to GDP ratio in Sweden is not  particularly higher than many other European countries (Andersson et al., 2003). 64  percent of total tax revenues were taxes on labor (tax on e arned income and social security contributions), 26 percent taxes on goods and services, and 10 percent taxes on capital. The main expenses of the public sector in 2004 w ere social security, education and health care (Swedish Tax Agency, 2006). The earned income tax consists of a local income tax and a state income tax. The local earned income tax is proportional and includes two parts: one levied by the municipalities, and one levied by the counties. The average combined rate was 31.5  percent in 2004 (the average municipal tax was 20.8 percent, aand nd the average county tax was 10.7 percent). It is the combined local tax that is generally considered when the municipal earned income tax is discussed in Sweden. The tax is paid in one chunk to the central government and then distributed to the municipalities (all taxes are collected by the Swedish Agency).The In municipal 2004 the municipal income variedsource from about 29 percent to aboutTax 34 percent. income tax is the tax greatest of revenue for the Swedish public sector (Swedish Tax Agency, 2006). 16 percent of the income earners above 20 years of age paid the state earned income tax in 2004, this tax consisted of an additional 20 percent on incomes exceeding SEK 291,800 ($ 41,700). Those earning more than SEK 460,600 ($ 65,800) paid an additional 5 percent tax on earnings above that amount (Swedish Tax Agency, 2006). For an individual living in an average tax municipality, the top marginal tax rate was thus 56.5 percent. Other than the municipal earned income tax, all taxes are decided about on the central government level. Tax deductions, progressivity, income tax credits and other  potential variations in the tax system are not in the hand of the local government to decide on.theThus, only variation regarding betweenTaxmunicipalities is regarding rate ofthe t he proportional the earned income taxes tax (Swedish Agency, 2006). This website stores data such as cookies to enable essential site functionality, as well as marketing, personalization, and analytics. You may change your settings at any time or accept the default settings.

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