Should Liberal Professionals and Farmers Be Liable to the German Local Business Tax? Theoretical Considerations and Empirical Analysis

30 Pages Posted: 30 Jan 2008

See all articles by Stefan Bach

Stefan Bach

German Institute for Economic Research (DIW Berlin)

Michael Broer

German Institute for Economic Research (DIW Berlin)

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Date Written: January 2008

Abstract

Taxing local business is a common feature of local public finance in many countries. The German local business tax (Gewerbesteuer) is the main tax revenue source of municipalities in Germany. Liberal professionals, however, have traditionally been exempted from it. In the past, the German Federal Constitutional Court justified this exemption by arguing that their production differed systematically, i.e. in their intensity of capital and labour employment. This paper shows that this claim does not hold true empirically. Furthermore, we analyse the fiscal and distributional effects of a hypothetical inclusion of the liberal professionals in the local business tax. We use a microsimulation model based on official local business tax and personal income tax files. The results indicate that the total revenue effect would be low, because the local business tax can be credited against the personal income tax. On the other hand, today's undesirably unequal distribution of local business tax revenues between municipalities would decrease. We conclude that if a local business tax is levied, all types of enterprise should be liable.

Keywords: Gewerbesteuer, lokale Unternehmensteuern, Personenunternehmen, freie Berufe, Unternehmensteuerreform 2008, Mikrosimulation

Suggested Citation

Bach, Stefan and Broer, Michael and Fossen, Frank M., Should Liberal Professionals and Farmers Be Liable to the German Local Business Tax? Theoretical Considerations and Empirical Analysis (January 2008). DIW Berlin Discussion Paper No. 761, Available at SSRN: https://ssrn.com/abstract=1088359 or http://dx.doi.org/10.2139/ssrn.1088359

Stefan Bach (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Michael Broer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Frank M. Fossen

University of Nevada, Reno ( email )

1664 N. Virginia Street
Reno, NV 89557-0030
United States

HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=2906

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