The Tax-Rate Elasticity of Local Business Profits

Local business profits respond to local business tax (LBT) rates that vary across municipalities. We estimate that a one percent increase in the LBT rate decreases the LBT base by 0.45 percent, based on the universe of German LBT return files, which include corporations and unincorporated businesses. However, the fiscal equalization scheme largely compensates municipalities for the loss in the LBT base when they increase the LBT rate. Our estimates suggest that using tax revenue data instead of tax return data, as commonly done in the literature, results in a significant bias of the elasticity away from zero.

Keywords: local business tax, corporate tax, tax responsiveness, tax-rate elasticity

JEL Classification: H25, H71

Suggested Citation: Suggested Citation

Fossen, Frank M. and Steiner, Viktor, The Tax-Rate Elasticity of Local Business Profits (November 5, 2014). Freie Universität Berlin, School of Business & Economics, Discussion Paper No. 28/2014, Economics, Available at SSRN: https://ssrn.com/abstract=2523408 or http://dx.doi.org/10.2139/ssrn.2523408