The Incentive Effect of Fiscal Equalization Transfers on Tax Policy

Thiess Büttner ()
Authors registered in the RePEc Author Service: Thiess Buettner ()

No CESifo Working Paper No. 1404, CESifo Working Paper Series from CESifo Group Munich

Abstract: A theoretical analysis considers the impact of a typical system of redistributive “fiscal equalization” transfers on the taxing effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax base. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to raise their business tax rates significantly.

Keywords: fiscal equalization; tax competition; fiscal federalism; incentive effect of taxation; regression discontinuity (search for similar items in EconPapers)
JEL-codes: H71 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2005
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Related works:
Working Paper: The Incentive Effect of Fiscal Equalization Transfers on Tax Policy (2005)
Journal Article: The incentive effect of fiscal equalization transfers on tax policy (2006)
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