Fiscal Federalism and Tax Administration: Evidence from Germany
AbstractIn 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 InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1307.
Length: 15 p.
Date of creation: 2013
Date of revision:
Fiscal federalism; taxation; tax-back rate; fiscal externalities;
Find related papers by JEL classification:
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-07-15 (Accounting & Auditing)
- NEP-ALL-2013-07-15 (All new papers)
- NEP-PBE-2013-07-15 (Public Economics)
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