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

Bernd Huber, Christian Baretti and Karl Lichtblau

No 333, CESifo Working Paper Series from CESifo

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 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.

Date: 2000
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