Do fiscal transfers alleviate business tax competition? Evidence from Germany

Peter Egger, Marko Koethenbuerger and Michael Smart

Journal of Public Economics, 2010, vol. 94, issue 3-4, 235-246

Abstract: According to theory, capacity equalization grants cause local governments to internalize the effects of their tax policies on revenues of neighboring jurisdictions and so raise equilibrium tax rates. This paper empirically analyzes the incentive effects of equalizing transfers on business tax policy by exploiting a natural experiment in the state of Lower Saxony which changed its equalization formula as of 1999. We resort to within-state and across-state difference-in-difference estimates to identify the reform effect on municipalities' business tax rates. Confirming the theoretical prediction, the reform had a significant impact on the municipalities' tax policy in the 4Â years after the reform with the effect stabilizing in the fourth to fifth years. The finding is robust to various alternative specifications.

Keywords: Fiscal; competition; Fiscal; federalism; Equalization; Gewerbesteuer (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (96)

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Working Paper: Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:94:y:2010:i:3-4:p:235-246

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