Economic integration and interdependence of tax policy

Carolin Holzmann and Axel von Schwerin

No 14/2015, FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics

Abstract: This paper provides empirical evidence for interdependence of jurisdictions' tax policies. We study tax policy interdependence between municipalities in the economically integrated European Metropolitan Area Frankfurt/Rhein-Main, that spreads across two German states, Hesse, and Rhineland-Palatinate. For empirical identification, we exploit two reforms in the Hessian local fiscal equalization scheme in the 1990s that induced quasi-experimental variation in Hessian metropolitan municipalities' business tax rates. In response to the Hessian metropolitan municipalities' tax rate increase, Rhineland-Palatine metropolitan municipalities increase their local business tax rates more moderately as compared to a matched control group of Rhineland-Palatine non-metropolitan municipalities. We argue that primarily tax competition considerations drive the results, as the average tax-rate differential between metropolitan municipalities in Rhineland-Palatinate and Hesse stays stable during the analysis period. We conclude that an arguably strong economic integration of municipalities seems a key determinant for the interdependence of their tax policies.

Keywords: fiscal interdependence; tax mimicking; local business tax; tax competition; fiscal equalization schemes (search for similar items in EconPapers)
JEL-codes: H20 H71 H77 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwqwdp:142015

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