Jeux sans frontières: Taxed Abroad, Served at Home. Cross-border Workers and the Municipal Budget

Abstract:

Under a 1974 bilateral agreement, cross-border workers living within 20 km of the Swiss border earn and pay income tax in Switzerland, but live, spend and use public services in Italy. We study the Italian municipalities along the border, where the 2002 EU–Switzerland free-movement agreement made the exemption bite: commuting from the eligible belt almost quadrupled. Using distance-band event studies and a kinked gradient at the 20 km line, we find that where the shock is largest the income-tax base leaves with the commuters while residents stay, and the loss is absorbed by a growing property-tax base, with no change in tax rates. Total revenues do not fall: they rise, and the more so the closer to the border. Policy responds instead at the outer edge of the belt: municipalities cut the tax on residence where residents are still mobile and new ones may be attracted.