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Do fiscal transfers alleviate business tax competition? Evidence from Germany

  • Egger, Peter
  • Koethenbuerger, Marko
  • Smart, Michael

According to theory, capacity equalization grants cause local governments to internalize the effects of their tax policies on revenues of neighboring jurisdictions and so raise equilibrium tax rates. This paper empirically analyzes the incentive effects of equalizing transfers on business tax policy by exploiting a natural experiment in the state of Lower Saxony which changed its equalization formula as of 1999. We resort to within-state and across-state difference-in-difference estimates to identify the reform effect on municipalities' business tax rates. Confirming the theoretical prediction, the reform had a significant impact on the municipalities' tax policy in the 4Â years after the reform with the effect stabilizing in the fourth to fifth years. The finding is robust to various alternative specifications.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 94 (2010)
Issue (Month): 3-4 (April)
Pages: 235-246

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Handle: RePEc:eee:pubeco:v:94:y:2010:i:3-4:p:235-246
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  2. Richard Blundell & Mónica Costa Dias, 2008. "Alternative Approaches to Evaluation in Empirical Microeconomics," CEF.UP Working Papers 0805, Universidade do Porto, Faculdade de Economia do Porto.
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  6. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053, June.
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  11. 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.
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  13. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer, vol. 9(6), pages 631-649, November.
  14. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer, vol. 9(4), pages 391-408, August.
  15. Bev Dahlby & Neil Warren, 2003. "Fiscal Incentive Effects of the Australian Equalisation System," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 434-445, December.
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  17. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
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