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

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  • Thiess Buettner

Abstract

In a theoretical model local jurisdictions provide a public input an d 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 others fiscal choices irrespective of whether the policy is more oriented towards raising local income or raising public consumption. These policy differences along with differences in size will however give rise to local differences in tax rates. The theoretical implications for the distribution of tax rates are then confronted with the case of the business tax (Gewerbesteuer) in West Germany. Taking into account possible competition effects, tax rates are found to be positively related to the population size of the communities even when controlling for density. This conforms with the hyothesis t hat large jurisdictions are less concerned with a tax policy aimed at attracting mobile capital. 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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 194.

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Date of creation: 1999
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Handle: RePEc:ces:ceswps:_194

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Keywords: Capital income taxation; public inputs; local public finance; spatial econometrics; business tax (Gewerbesteuer);

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References

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  1. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers, Institute for Fiscal Studies W94/07, Institute for Fiscal Studies.
  2. Timothy Besley & Anne Case, 1992. "Incumbent Behavior: Vote Seeking, Tax Setting and Yardstick Competition," NBER Working Papers 4041, National Bureau of Economic Research, Inc.
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  4. Fitzenberger, Bernd, 1998. "The moving blocks bootstrap and robust inference for linear least squares and quantile regressions," Journal of Econometrics, Elsevier, Elsevier, vol. 82(2), pages 235-287, February.
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  6. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  7. Kirchgassner, Gebhard & Pommerehne, Werner W., 1996. "Tax harmonization and tax competition in the European Union: Lessons from Switzerland," Journal of Public Economics, Elsevier, Elsevier, vol. 60(3), pages 351-371, June.
  8. 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, Elsevier, vol. 52(3), pages 285-307, October.
  9. Matsumoto, Mutsumi, 1998. "A note on tax competition and public input provision," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 28(4), pages 465-473, July.
  10. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Journal of Public Economics, Elsevier, Elsevier, vol. 66(2), pages 247-274, November.
  11. Ashworth, John & Heyndels, Bruno, 1997. "Politicians' preferences on local tax rates: An empirical analysis," European Journal of Political Economy, Elsevier, Elsevier, vol. 13(3), pages 479-502, September.
  12. Epple, Dennis & Zelenitz, Allan, 1981. "The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1197-1217, December.
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Citations

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Cited by:
  1. Jack Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," CESifo Working Paper Series 554, CESifo Group Munich.
  2. Rainald Borck & Marco Caliendo & Viktor Steiner, 2005. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," Discussion Papers of DIW Berlin 528, DIW Berlin, German Institute for Economic Research.
  3. Michael Keen, 2002. "The German Tax Reform of 2000," International Tax and Public Finance, Springer, Springer, vol. 9(5), pages 603-621, September.
  4. Sebastian Hauptmeier & Ferdinand Mittermaier & Johannes Rincke, 2008. "Fiscal Competition over Taxes and Public Inputs: Theory and Evidence," CESifo Working Paper Series 2499, CESifo Group Munich.
  5. Lars P Feld, 2004. "On Tax Competition: The (Un-)Expected Advantages of Decentralized Fiscal Autonomy," Marburg Working Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200425, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  6. Maarten Allers & J. Elhorst, 2005. "Tax Mimicking and Yardstick Competition Among Local Governments in the Netherlands," International Tax and Public Finance, Springer, Springer, vol. 12(4), pages 493-513, August.
  7. Claudio A. Agostini, 2004. "Tax Interdependence in American States," Econometric Society 2004 North American Winter Meetings, Econometric Society 56, Econometric Society.
  8. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Document, CPB Netherlands Bureau for Economic Policy Analysis 125, CPB Netherlands Bureau for Economic Policy Analysis.
  9. Hauptmeier, Sebastian & Mittermaier, Ferdinand & Rincke, Johannes, 2012. "Fiscal competition over taxes and public inputs," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 42(3), pages 407-419.
  10. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July.

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