Zoning laws designed to protect neighborhood characters play major roles in modern economies. Early work on zoning includes Hamilton (1975) and Oates (1977). They constructed models containing the Tiebout (1956) assumptions of ever-moving households who search for localities that provide packages of public goods, services and taxes that maximize their utilities. In order to eliminate potential fiscal and environmental externalities associated with incoming households, zoning ordinances which stipulate minimum quantities of housing or minimum lot sizes serve as a tool to create homogeneous communities. Models with labor-leisure choice following the tradition of Becker (1965) have appeared in some areas of public finance, such as tax competition papers of Gordon (1986) and Bucovetsky and Wilson (1991). Some of the models in public economics including Atkinson and Stiglitz (1980) examine how taxes affect household behavior with respect to time allocation. Altman (2001) argues that studies possessing predictive power on household income-leisure choice should focus on target income. None, however, has considered the effects of local income taxes or property taxes plus zoning. While there is a general conclusion in the literature that taxes are distortionary, this paper finds that taxes and zoning are non-distortionary and household utility is enhanced when taxes are combined with zoning.

Keywords: Local income taxes, property taxes, zoning, labor-leisure choice, Cobb-Douglas

JEL classifications: H23, H24, H31, H41, J22