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Are states being punished for their successful efforts in attracting business? The incentives of the municipal finance system

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  • Christian Baretti

Abstract

Municipal financing has become a federal issue in Germany. On 27 March the federal cabinet set up a commission to investigate the reform of municipal financing. Behind the current, critical situation is that in the course of tax reform, local business taxes, a major source of municipal revenue, were clearly reduced. The central issue of municipal finance reform is thus a reform of local business taxes. Various propositions have been put forward, including a broadening of the assessment base or an abolition of local business taxes (and substitution by a municipal surcharge on income and corporation tax). In this article Dr. Christian Baretti, former Ifo researcher, analyses the efficiency effects of the existing municipal finance system on municipal policy. The assumption is that the local business tax should be an incentive for the municipalities to foster their own economic strength. The more business-friendly environment a municipality creates - so the underlying idea - the more it will gain from the local business taxes. Baretti's study examines this thesis by means of an empirical analysis of Saarland, based on Ifo's recent investigation of the Saarland's municipal revenue sharing scheme. Parallel conclusions can also be drawn for the remaining German states since the municipal revenue sharing schemes are relatively similar.

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  • Christian Baretti, 2002. "Are states being punished for their successful efforts in attracting business? The incentives of the municipal finance system," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 55(07), pages 10-16, April.
    • Handle: RePEc:ces:ifosdt:v:55:y:2002:i:07:p:10-16
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    References listed on IDEAS

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    1. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2001. "Weniger Wachstum und Steueraufkommen durch den Finanzausgleich," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 81(1), pages 38-44.
    2. Christian Baretti, 2001. "Incentive effects of the Länder fiscal equalisation scheme: Theoretical and empirical analysis," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 6.
    3. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2001. "Weniger Wachstum und Steueraufkommen durch den Finanzausgleich," Munich Reprints in Economics 20130, University of Munich, Department of Economics.
    4. Bernd Huber & Christian Baretti & Karl Lichtblau, 2000. "A Tax on Tax Revenue. The Incentive Effects of Equalizing Transfers: Evidence from Germany," CESifo Working Paper Series 333, CESifo.
    5. Christian Baretti & Robert Fenge & Bernd Huber & Willi Leibfritz & Matthias Steinherr, 2000. "Prospects and limits of federal competition," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 1.
    6. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
    7. Rüdiger Parsche & Christian Baretti & Robert Fenge & Steffen Jahn & Erich Langmantel & Chang Woon Nam & Bettina Reichl & Matthias Steinherr & Thorsten Uehlein & Frank Zander, 2001. "Analyses and Further Development of Measuring Municipal Expenditure Needs in Saarland," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 7.
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    1. Thiess Büttner & Alexander Ebertz & Björn Kauder & Markus Reischmann, 2013. "Finanzwissenschaftliche Begutachtung des kommunalen Finanzausgleichs in Rheinland-Pfalz," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 58.
    2. Thiess Büttner & Fédéric Holm-Hadulla & Rüdiger Parsche & Christiane Starbatty, 2008. "Analyse und Weiterentwicklung des kommunalen Finanzausgleichs in Nordrhein-Westfalen," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 41.
    3. David Bauer, 2017. "Die Anreizwirkungen des kommunalen Finanzausgleichs," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 24(02), pages 26-30, April.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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