Tax and the City - A Theory of Local Tax Competition and Evidence for Germany

47 Pages Posted: 4 Mar 2012

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Steffen Osterloh

Center for European Economic Research (ZEW)

Date Written: 2012

Abstract

Despite the well-developed empirical literature on local tax competition, little is known about the actual spatial structure of inter-municipal competition. Assuming that competition takes place only among neighbours (as in the empirical literature) is at odds with the theoretical approaches where all jurisdictions compete simultaneously. In this paper we use a survey conducted among mayors in the German state of Baden-W├╝rttemberg to show that the perceived intensity of competition for firms varies considerably between jurisdictions and can mainly be explained by the size and location of the jurisdiction. Based on these findings, we develop a sequential tax competition model in which urban centres compete with other urban centres and rural jurisdictions in their own neighbourhood. This model predicts that larger jurisdictions do not necessarily rely more on capital taxes; in case they face strong competition with more distant competitors, larger cities even have lower capital taxes. In addition, we discuss how the model compares to a standard simultaneous approach and show that results from our sequential model are in line with trends in local taxation in Baden-W├╝rttemberg.

Keywords: local tax competition, survey, intensity of competition, asymmetric tax competition

JEL Classification: H71, H73, H77

Suggested Citation

Janeba, Eckhard and Osterloh, Steffen, Tax and the City - A Theory of Local Tax Competition and Evidence for Germany (2012). ZEW - Centre for European Economic Research Discussion Paper No. 12-005. Available at SSRN: https://ssrn.com/abstract=2014602 or http://dx.doi.org/10.2139/ssrn.2014602

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Steffen Osterloh

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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