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Fiscal Equalization as a Driver of Tax Increases: Empirical Evidence from Germany

Thiess Büttner () and Manuela Krause

No 7260, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper exploits a recent devolution of tax setting powers in the German federation to study the effects of fiscal equalization on subnational governments’ tax policy. Based on an analysis of the system of fiscal equalization transfers, we argue that the redistribution of revenues provides incentives for states to raise rather than to lower their tax rates. The empirical analysis exploits differences in fiscal redistribution among the states and over time. Using a comprehensive simulation model, the paper computes the tax-policy incentives faced by each state over the years and explores their empirical effects on tax policy. The results support significant and substantial effects. Facing full equalization a state is predicted to set the tax rate from the real estate transfer tax about 1.3 percentage points higher than without. Our analysis also shows that the incentive to raise tax rates is proliferated by the equalization system because the states’ decisions to raise their tax rates have intensified fiscal redistribution over time.

Keywords: fiscal equalization; tax autonomy; real estate transfer tax (search for similar items in EconPapers)
JEL-codes: H77 H24 R38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-eur, nep-law, nep-pbe and nep-ure
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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