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Fiscal Federalism and Tax Administration: Evidence from Germany

  • Timm Bönke
  • Beate Jochimsen
  • Carsten Schröder

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.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1307.

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Length: 15 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1307
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  6. Goodspeed, Timothy J., 1999. "Tax competition and tax structure in open federal economies: evidence from OECD countries with implications for the European Union," ZEW Discussion Papers 99-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  8. 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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  14. Massimo Bordignon & Paolo Manasse & Guido Tabellini, . "Optimal Regional Redistribution Under Asymmetric Information," Working Papers 93, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. Cremer, H. & Marchand, M. & Pestieau, P., . "Interregional redistribution through tax surcharge," CORE Discussion Papers RP -1218, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Breuille, Marie-Laure & Gary-Bobo, Robert J., 2007. "Sharing budgetary austerity under free mobility and asymmetric information: An optimal regulation approach to fiscal federalism," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1177-1196, June.
  17. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
  18. Bönke, Timm & Jochimsen, Beate & Schröder, Carsten, 2011. "Fiscal equalization and regions' (un)willingness-to-tax: Evidence from Germany," Economics Working Papers 2011,06, Christian-Albrechts-University of Kiel, Department of Economics.
  19. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer, vol. 4(4), pages 407-427, November.
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