The Incentive Effect of Fiscal Equalization Transfers on Tax Policy
AbstractA theoretical analysis considers the impact of a typical system of redistributive “fiscal equalization” transfers on the taxing effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax base. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to raise their business tax rates significantly.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1404.
Date of creation: 2005
Date of revision:
fiscal equalization; tax competition; fiscal federalism; incentive effect of taxation; regression discontinuity;
Other versions of this item:
- Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, Elsevier, vol. 90(3), pages 477-497, February.
- Büttner, Thiess, 2005. "The Incentive Effect of Fiscal Equalization Transfers on Tax Policy," Center for European, Governance and Economic Development Research Discussion Papers 37, University of Goettingen, Department of Economics.
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-20 (All new papers)
- NEP-PBE-2005-02-20 (Public Economics)
- NEP-PUB-2005-02-20 (Public Finance)
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