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Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany

Author

Listed:
  • Peter Egger
  • Marko Köthenbürger
  • Michael Smart

Abstract

The 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 four years after the reform with a “phasing out” of the effect starting in the fourth to fifth year. The finding is robust to various alternative specifications.

Suggested Citation

  • Peter Egger & Marko Köthenbürger & Michael Smart, 2007. "Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany," CESifo Working Paper Series 1955, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1955
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    References listed on IDEAS

    as
    1. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
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    3. repec:spr:portec:v:1:y:2002:i:2:d:10.1007_s10258-002-0010-3 is not listed on IDEAS
    4. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February.
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    6. Michael Smart, 2007. "Raising taxes through equalization," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1188-1212, November.
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    9. 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;International Institute of Public Finance, vol. 9(6), pages 631-649, November.
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    16. 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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