We propose a difference-in-differences strategy to identify the existence of interjurisdictional tax competition. Our strategy rests on differences between desired tax levels determined by culture-specific preferences and equilibrium tax levels determined by fiscal externalities and by preferences. While preferences differ systematically between French-speaking and German-speaking Swiss municipalities, local income tax burdens exhibit smooth spatial gradients. To qualify the empirical evidence, we develop a theoretical model of strategic tax setting by local governments that anticipate the effects of taxes on the per capita income and the median “hedonic” income, two inextricable consequences of the sorting of heterogeneous individuals.

In light of the debate over inclusive education, this paper evaluates the impact of exposure to special needs (SN) peers. More classroom peers with SN lower performance, the probability of entering postcompulsory education, and income at ages 17 to 25. SN students and students at the lower end of the achievement distribution suffer most from higher inclusion. We analyze the effects of reallocation policies to alleviate negative externalities, and demonstrate that inclusion is preferable to segregation in terms of maximizing average test scores.