Minimum Standards, Fixed Costs and Taxing Autonomy of Subnational Governments
Dresden University of Technology - Institute for Applied Public Finances and Fiscal Policy; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
July 19, 2008
The paper examines the question how fiscally strong and fiscally weak states respond to taxing autonomy at the state level, a subject that is currently under debate in Germany where states do have virtually no power to tax. We use a simple theoretical model that incorporates state surtaxes on the federal income tax bill taking into account fixed costs as well as minimum standards for the provision of public services. We show that both factors work in the direction of forcing fiscally weak states to collect higher surtaxes as compared to fiscally strong states. The empirical section presents evidence on the importance of fixed costs at the state level and calculates the distributional effects of taxing autonomy taking feedbacks of the fiscal equalization system into account. In addition simple estimates of the importance of spending on minimum standards are derived.
Keywords: Fiscal federalism, minimum standards, tax autonomy, fiscal equalization
JEL Classification: H11, H50, H71working papers series
Date posted: July 23, 2008
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