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Minimum Standards, Fixed Costs and Taxing Autonomy of SubnationalGovernments

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  • Helmut Seitz
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    Abstract

    The paper examines the question how fiscally strong and fiscally weak states respond to taxing autonomy at the state level, a subject that is currently under debate in Germany where states do have virtually no power to tax. We use a simple theoretical model that incorporates state surtaxes on the federal income tax bill taking into account fixed costs as well as minimum standards for the provision of public services. We show that both factors work in the direction of forcing fiscally weak states to collect higher surtaxes as compared to fiscally strong states. The empirical section presents evidence on the importance of fixed costs at the state level and calculates the distributional effects of taxing autonomy taking feedbacks of the fiscal equalization system into account. In addition simple estimates of the importance of spending on minimum standards are derived.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-06/cesifo1_wp2341.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2341.

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    Date of creation: 2008
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    Handle: RePEc:ces:ceswps:_2341

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    Related research

    Keywords: fiscal federalism; minimum standards; tax autonomy; fiscal equalization;

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    1. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics, University of Munich, Department of Economics 20129, University of Munich, Department of Economics.
    2. Hoyt, William H., 1992. "Market power of large cities and policy differences in metropolitan areas," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 22(4), pages 539-558, November.
    3. Thiess Büttner & Robert Schwager, 2003. "Länderautonomie in der Einkommensteuer: Konsequenzen eines Zuschlagsmodells," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 223(5), pages 532-555.
    4. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 363-370, March.
    5. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
    6. Feld, Lars P, 2000. " Tax Competition and Income Redistribution: An Empirical Analysis for Switzerland," Public Choice, Springer, Springer, vol. 105(1-2), pages 125-64, October.
    7. Thomas Liebig & Alfonso Sousa-Poza, 2006. "The influence of taxes on migration: evidence from Switzerland," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 30(2), pages 235-252, March.
    8. Lars P. Feld & Gebhard Kirchgässner, 2000. "Income Tax Competition at the State and Local Level in Switzerland," CESifo Working Paper Series 238, CESifo Group Munich.
    9. Wildasin, David E., 1991. "Some rudimetary 'duopolity' theory," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 21(3), pages 393-421, November.
    10. Isabelle Joumard & Per Mathis Kongsrud, 2003. "Fiscal Relations across Government Levels," OECD Economic Studies, OECD Publishing, vol. 2003(1), pages 155-229.
    11. 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.
    12. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer, Springer, vol. 9(6), pages 631-649, November.
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