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Fiscal Federalism and Tax Administration: Evidence from Germany

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  • Timm Bönke
  • Beate Jochimsen
  • Carsten Schröder

Abstract

In many federations, fiscal equalization schemes soften fiscal imbalances across the member states. Such schemes usually imply that the member states internalize only a small fraction of the additional tax revenue from an expansion of the state-specific tax bases, while the remainder of the additional tax revenue is redistributed horizontally or vertically. We address the question as to which extent state-level jurisdictions in such a federation underexploit their tax bases. By means of a stylized model we show that the state authorities in such a federation have incentives to align the effective tax rates of their residents to the internalized fraction of marginal tax revenue. We empirically test the model using three setups: one state level exercise and two micro level exercises using administrative income-tax data in form of an OLS regression and a natural-experiments design. All setups support the results from our theoretical model.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1307.

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Length: 15 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1307

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Keywords: Fiscal federalism; taxation; tax-back rate; fiscal externalities;

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References

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Cited by:
  1. Hechtner, Frank, 2013. "Ökonomische Anreizwirkungen im bundesstaatlichen Finanzausgleich," Discussion Papers 2013/15, Free University Berlin, School of Business & Economics.

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