Do fiscal transfers alleviate business tax competition? Evidence from Germany
AbstractAccording to theory, capacity equalization grants cause local governments to internalize the effects of their tax policies on revenues of neighboring jurisdictions and so raise equilibrium tax rates. This paper empirically analyzes the incentive effects of equalizing transfers on business tax policy by exploiting a natural experiment in the state of Lower Saxony which changed its equalization formula as of 1999. We resort to within-state and across-state difference-in-difference estimates to identify the reform effect on municipalities' business tax rates. Confirming the theoretical prediction, the reform had a significant impact on the municipalities' tax policy in the 4Â years after the reform with the effect stabilizing in the fourth to fifth years. The finding is robust to various alternative specifications.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Public Economics.
Volume (Year): 94 (2010)
Issue (Month): 3-4 (April)
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Web page: http://www.elsevier.com/locate/inca/505578
Fiscal competition Fiscal federalism Equalization Gewerbesteuer;
Other versions of this item:
- Peter Egger & Marko Koethenbuerger & Michael Smart, 2007. "Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany," CESifo Working Paper Series 1955, CESifo Group Munich.
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