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Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany

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Author Info
Thiess Büttner

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Abstract

In a theoretical model local jurisdictions provide a public input and a public consumption good financed by a tax on capital income. When deciding about tax rate and budget structure the jurisdictions will generally respond to each other's fiscal choices irrespective of whether their policy is oriented more towards raising local income or raising public consumption. These policy differences along with differences in size are then shown to give rise to local differences in tax rates. The theoretical implications for the distribution of tax rates are then confronted with the case of local business taxation (Gewerbesteuer) in West Germany. Taking into account local interdependence in tax rate decisions, tax rates are found to be positively related to the population size of the communities even when controlling for density. This conforms with the hypothesis that large jurisdictions experience some market power in the capital market. In addition, federally mandated local welfare expenses are established as a determinant of local tax differences raising concerns about distortions induced by the German federal system.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 56 (1999)
Issue (Month): 3/4 (July)
Pages: 363-
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200007)56:3/4_363:dotril_2.0.tx_2-u

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March. [Downloadable!] (restricted)
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  2. Epple, Dennis & Zelenitz, Allan, 1981. "The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1197-1217, December. [Downloadable!] (restricted)
  3. Kirchgassner, Gebhard & Pommerehne, Werner W., 1996. "Tax harmonization and tax competition in the European Union: Lessons from Switzerland," Journal of Public Economics, Elsevier, vol. 60(3), pages 351-371, June. [Downloadable!] (restricted)
  4. McHone, W Warren, 1987. "Factors in the Adoption of Industrial Development Incentives by States," Applied Economics, Taylor and Francis Journals, vol. 19(1), pages 17-29, January.
  5. Hans-Werner Sinn, 1996. "The Subsidiarity Principle and Market Failure in Systems Competition," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
  6. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January. [Downloadable!] (restricted)
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  7. Ashworth, John & Heyndels, Bruno, 1997. "Politicians' preferences on local tax rates: An empirical analysis," European Journal of Political Economy, Elsevier, vol. 13(3), pages 479-502, September. [Downloadable!] (restricted)
  8. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  9. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October. [Downloadable!] (restricted)
  10. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September. [Downloadable!] (restricted)
  11. Matsumoto, Mutsumi, 1998. "A note on tax competition and public input provision," Regional Science and Urban Economics, Elsevier, vol. 28(4), pages 465-473, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Claudio A. Agostini, 2004. "Tax Interdependence in American States," Econometric Society 2004 North American Winter Meetings 56, Econometric Society. [Downloadable!]
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  2. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Documents 125, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  3. Maarten Allers & J. Elhorst, 2005. "Tax Mimicking and Yardstick Competition Among Local Governments in the Netherlands," International Tax and Public Finance, Springer, vol. 12(4), pages 493-513, August. [Downloadable!] (restricted)
  4. Michael Keen, 2002. "The German Tax Reform of 2000," International Tax and Public Finance, Springer, vol. 9(5), pages 603-621, September. [Downloadable!] (restricted)
  5. Rainald Borck & Marco Caliendo & Viktor Steiner, 2006. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," IZA Discussion Papers 2428, Institute for the Study of Labor (IZA). [Downloadable!]
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