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Local Business Taxation and Competition for Capital: The Choice of the Tax Rate

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Author Info
Thiess Buettner ()

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Abstract

A theoretical model describes the local choice of the tax rate on capital income. It establishes preferences and various fiscal conditions - including the tax rates of competing jurisdictions - as determinants of the tax rate. The empirical implications are tested using a large panel of jurisdictions in Germany, which have discretion in setting the local rate of the business tax. Tax competition is identified by means of instrumental variables techniques. Despite significant competition effects between local neighbors, where tax rates are strategic complements, jurisdictions are found to have some leeway in using the tax rate as an instrument of their policy. In particular, large jurisdictions set higher tax rates in interjurisdictional competition.

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File URL: http://www.cesifo-group.de/DocCIDL/cesifo_wp440.pdf
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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 440.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_440

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Related research
Keywords: Local public finance; tax competition; instrumental variables; spatial econometrics; business taxation;

Other versions of this item:

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D62 - Microeconomics - - Welfare Economics - - - Externalities
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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This page was last updated on 2009-11-3.

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