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Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany

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  • Thiess Büttner

Abstract

In a theoretical model local jurisdictions provide a public input an d a public consumption good financed by a tax on capital income. When deciding about tax rate and budget structure the jurisdictions will generally respond to each others fiscal choices irrespective of whether the policy is more oriented towards raising local income or raising public consumption. These policy differences along with differences in size will however give rise to local differences in tax rates. The theoretical implications for the distribution of tax rates are then confronted with the case of the business tax (Gewerbesteuer) in West Germany. Taking into account possible competition effects, tax rates are found to be positively related to the population size of the communities even when controlling for density. This conforms with the hyothesis t hat large jurisdictions are less concerned with a tax policy aimed at attracting mobile capital. In addition, federally mandated local welfare expenses are established as a determinant of local tax differences raising concerns about distortions induced by the German federal system.

Suggested Citation

  • Thiess Büttner, 1999. "Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany," CESifo Working Paper Series 194, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_194
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    Cited by:

    1. Rainald Borck & Marco Caliendo & Viktor Steiner, 2007. "Fiscal Competition and the Composition of Public Spending: Theory and Evidence," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(2), pages 264-277, June.
    2. Hauptmeier, Sebastian & Mittermaier, Ferdinand & Rincke, Johannes, 2012. "Fiscal competition over taxes and public inputs," Regional Science and Urban Economics, Elsevier, vol. 42(3), pages 407-419.
    3. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, vol. 88(6), pages 1149-1168, June.
    4. Claudio A. Agostini, 2004. "Tax Interdependence in American States," Econometric Society 2004 North American Winter Meetings 56, Econometric Society.
    5. Michael Keen, 2002. "The German Tax Reform of 2000," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(5), pages 603-621, September.
    6. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July.
    7. Sebastian Hauptmeier & Ferdinand Mittermaier & Johannes Rincke, 2008. "Fiscal Competition over Taxes and Public Inputs: Theory and Evidence," CESifo Working Paper Series 2499, CESifo Group Munich.
    8. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Document 125, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Maarten Allers & J. Elhorst, 2005. "Tax Mimicking and Yardstick Competition Among Local Governments in the Netherlands," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 493-513, August.
    10. Lars P Feld, 2004. "On Tax Competition: The (Un-)Expected Advantages of Decentralized Fiscal Autonomy," Marburg Working Papers on Economics 200425, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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