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Fiscal Equalization and Tax Enforcement

Author

Listed:
  • Bönke Timm

    (School of Business and Economics Freie Universität Berlin,Berlin, Germany)

  • Schröder Carsten

    (SOEP at German Institut for Economic Research Berlin (DIW),Berlin, Germany)

  • Jochimsen Beate

    (Department of Economics, Berlin School of Economics and Law and German Institute for Economic Research Berlin (DIW),Berlin, Germany)

Abstract

In many countries organized as federations, fiscal equalization schemes have been implemented to mitigate vertical or horizontal imbalances. Such schemes usually imply that the member states of the federation can only partly internalize (marginal) tax revenue before redistribution. Aside from the internalized marginal revenue, referred to as the marginal tax-back rate, the remainder is redistributed. We investigate the extent to which state-level authorities in such federation under-exploit their tax bases. By means of a stylized model, we show that the member states have an incentive to align the effective tax rates on their residents with the level of the marginal tax-back rate. We empirically test the model using state-level and micro-level taxpayer data, OLS regressions and natural experiments. Our empirical findings support the results from our theoretical model. Particularly, we find that states with a higher marginal tax-back rate exploit the tax base to a higher extent.

Suggested Citation

  • Bönke Timm & Schröder Carsten & Jochimsen Beate, 2017. "Fiscal Equalization and Tax Enforcement," German Economic Review, De Gruyter, vol. 18(3), pages 377-409, August.
    • Handle: RePEc:bpj:germec:v:18:y:2017:i:3:p:377-409
    DOI: 10.1111/geer.12110
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    Cited by:

    1. Blesse, Sebastian & Heinemann, Friedrich & Nover, Justus, 2022. "Bundesländerindex Familienunternehmen: Standortfaktoren innerhalb Deutschlands im Vergleich," Studien, Stiftung Familienunternehmen / Foundation for Family Businesses, number 264906.
    2. Pablo Burriel & Panagiotis Chronis & Maximilian Freier & Sebastian Hauptmeier & Lukas Reiss & Dan Stegarescu & Stefan Van Parys, 2020. "A fiscal capacity for the euro area: lessons from existing fiscal-federal systems," Occasional Papers 2009, Banco de España.
    3. Wladislaw Mill & Cornelius Schneider, 2023. "The Bright Side of Tax Evasion," CESifo Working Paper Series 10615, CESifo.
    4. Yannick Bury & Lars P. Feld & Heiko T. Burret, 2024. "Skimming the achieved? Quantifying the fiscal incentives of the German fiscal equalization scheme and its reforms since 1970," Economics of Governance, Springer, vol. 25(3), pages 291-334, September.
    5. Lin, Gaoyi & Ma, Liuding & Liao, Hui & Li, Jingying, 2024. "Nothing comes for free: Evidence from a tax reduction of China," China Economic Review, Elsevier, vol. 83(C).
    6. Heinemann, Friedrich & Steger, Paul, 2026. "Bundesländerindex Familienunternehmen: Standortfaktoren innerhalb Deutschlands im Vergleich. 2. Auflage," Studien, Stiftung Familienunternehmen / Foundation for Family Businesses, number 336276.
    7. Jochimsen Beate, 2018. "Federalism in Germany, Italy, and the European Union: History, Characteristics, and Perspectives," Journal for Markets and Ethics, Sciendo, vol. 6(1), pages 145-154, June.

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