Opposites attract: The effect of the federal income tax code on community composition

If houses in two homogeneous but dissimilar communities are reorganized as a single heterogeneous community, property tax payments are shifted from owners of small houses to owners of large houses. We consider three aspects of the federal income tax code which causes this shifting to raise aggregate property values in the heterogeneous community. First, the property tax is deductible and the tax rate structure is progressive. Second, some families do not itemize. Third, the restriction on saving in tax-deferring assets suggests the use of different interest rates to capitalize future property taxes. Because of these aspects, heterogeneous communities are established provided the different family types desire similar levels of public service.