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A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany

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  • Baretti, Christian
  • Huber, Bernd
  • Lichtblau, Karl

Abstract

Several recent studies suggest that equalizing transfers in a federal system may distort the tax policy decisions of states. We study this issue for the German federal fiscal system. In a simple theoretical model, we first identify a substitution effect and an income effect of equalizing transfers. Our main hypothesis is that both effects should tend to reduce tax revenue of German states. We perform various empirical tests which confirm this hypothesis.

Suggested Citation

  • 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.
  • Handle: RePEc:lmu:muenar:20129
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