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Is the Local Business Tax a User Tax? An Empirical Investigation for Germany / Ist die Gewerbesteuer eine Äquivalenzsteuer? Eine empirische Analyse für Deutschland

Listed author(s):
  • Fuest Clemens

    ()

  • Riphahn Regina

    ()

    (University of Munich, Ludwigstr. 28 VG, D-80539 Munich)

The theory of fiscal federalism argues that local governments should only tax mobile tax bases for the purpose of charging user taxes which correct for congestion effects. Empirically, we observe that local governments do levy taxes on mobile bases. In Germany, this is the local business tax (Gewerbesteuer). Since such taxes are efficient only if they are raised to cover congestion effects, the justification for these taxes usually put forward is that they serve as user taxes. This paper tests empirically whether that justification holds for the case of German local business taxes. Our findings do not support the user tax argument. Instead, our results suggest that local governments use the local business tax as a source of revenue for general public expenditures. Our empirical analysis finds statistically significant positive effects of changes in expenditures for social assistance and interest payments on subsequent tax rate changes. Our results are thus consistent with the view prevailing in the literature according to which local business tax rates are set in response to general financial pressure in local government budgets.

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Article provided by De Gruyter in its journal Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik).

Volume (Year): 221 (2001)
Issue (Month): 1 (February)
Pages: 14-31

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Handle: RePEc:jns:jbstat:v:221:y:2001:i:1:p:14-31
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  1. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Munich Reprints in Economics 19854, University of Munich, Department of Economics.
  2. Wellisch,Dietmar, 2000. "Theory of Public Finance in a Federal State," Cambridge Books, Cambridge University Press, number 9780521630351, October.
  3. Dietmar Wellisch & Jorg Hülshorst, 2000. "A Second-Best Theory of Local Government Policy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(1), pages 5-22, February.
  4. Richter, W.F., 1991. "The Efficient Allocation of Local Public Factors in Tiebout's Tradition," The Warwick Economics Research Paper Series (TWERPS) 378, University of Warwick, Department of Economics.
  5. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  6. Wallace E. Oates, 1991. "Studies In Fiscal Federalism," Books, Edward Elgar Publishing, number 342.
  7. Seitz, Helmut, 1995. "The Productivity and Supply of Urban Infrastructures," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 29(2), pages 121-141, May.
  8. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
  9. Hoyt, William H., 1991. "Competitive jurisdictions, congestion, and the Henry George Theorem : When should property be taxed instead of land?," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 351-370, November.
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