Fiscal Federalism and Tax Administration: Evidence from Germany

Timm Bönke, Beate Jochimsen and Carsten Schröder

No 1307, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: In many federations, fiscal equalization schemes soften fiscal imbalances across the member states. Such schemes usually imply that the member states internalize only a small fraction of the additional tax revenue from an expansion of the state-specific tax bases, while the remainder of the additional tax revenue is redistributed horizontally or vertically. We address the question as to which extent state-level jurisdictions in such a federation underexploit their tax bases. By means of a stylized model we show that the state authorities in such a federation have incentives to align the effective tax rates of their residents to the internalized fraction of marginal tax revenue. We empirically test the model using three setups: one state level exercise and two micro level exercises using administrative income-tax data in form of an OLS regression and a natural-experiments design. All setups support the results from our theoretical model.

Keywords: Fiscal federalism; taxation; tax-back rate; fiscal externalities (search for similar items in EconPapers)
JEL-codes: C21 H21 H77 (search for similar items in EconPapers)
Pages: 15 p.
Date: 2013
New Economics Papers: this item is included in nep-acc and nep-pbe
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Citations: View citations in EconPapers (11)

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