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Fiscal Federalism and Tax Administration: Evidence from Germany

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  • Timm Bönke
  • Beate Jochimsen
  • Carsten Schröder

Abstract

In many federations, fiscal equalization schemes soften fiscal imbalances across the member states. Such schemes usually imply that the member states internalize only a small fraction of the additional tax revenue from an expansion of the state-specific tax bases, while the remainder of the additional tax revenue is redistributed horizontally or vertically. We address the question as to which extent state-level jurisdictions in such a federation underexploit their tax bases. By means of a stylized model we show that the state authorities in such a federation have incentives to align the effective tax rates of their residents to the internalized fraction of marginal tax revenue. We empirically test the model using three setups: one state level exercise and two micro level exercises using administrative income-tax data in form of an OLS regression and a natural-experiments design. All setups support the results from our theoretical model.

Suggested Citation

  • Timm Bönke & Beate Jochimsen & Carsten Schröder, 2013. "Fiscal Federalism and Tax Administration: Evidence from Germany," Discussion Papers of DIW Berlin 1307, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1307
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    1. repec:bpj:pewipo:v:18:y:2017:i:2:p:145-158:n:1 is not listed on IDEAS
    2. Hechtner, Frank, 2013. "Ökonomische Anreizwirkungen im bundesstaatlichen Finanzausgleich," Discussion Papers 2013/15, Free University Berlin, School of Business & Economics.
    3. Achim Truger & Dieter Vesper, 2014. "Zur Reform des Länderfinanzausgleichs ? eine Notwendigkeit?," IMK Studies 37-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Dilla, Diana, 2017. "Staatsverschuldung und Verschuldungsmentalität
      [Public Debt and Debt Mentality]
      ," MPRA Paper 79432, University Library of Munich, Germany.
    5. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2014. "Mehr Vertrauen in Marktprozesse. Jahresgutachten 2014/15," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201415.
    6. Malgorzata Magdalena Hybka, 2016. "Allocating Tax Revenue To Sub-Central Government Levels: Lessons From Germany And Poland," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 11(4), pages 689-709, December.
    7. Angel De la Fuente & Christian Kastrop & Michael Thöne, 2016. "Regional Financing in Germany and Spain: Comparative Reform Perspectives," Working Papers 16/04, BBVA Bank, Economic Research Department.
    8. Richard M. Bird, 2015. "Fiscal Decentralization and Decentralizing Tax Administration: Different Questions, Different Answers," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1509, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

    More about this item

    Keywords

    Fiscal federalism; taxation; tax-back rate; fiscal externalities;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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