Higher Taxes on Less Elastic Goods? Evidence from German Municipalities

51 Pages Posted: 26 Sep 2018 Last revised: 9 Jan 2019

See all articles by Sebastian Blesse

Sebastian Blesse

ZEW – Leibniz Centre for European Economic Research

Philipp Doerrenberg

ZEW – Leibniz Centre for European Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Anna Rauch

Independent

Date Written: September 1, 2018

Abstract

German municipalities have substantial autonomy in setting taxes on two distinct tax bases: business profits and property values. We use this setting and a two-step approach to explore whether implemented tax policy is consistent with the seminal inverse-elasticity rule. First, we estimate the tax elasticity of the two tax bases using event-study and generalized differences-in-differences methods based on the universe of municipalities in 1995-2010. Second, we compare the ratio of the observed tax rates for the two tax bases to the ratio of their estimated elasticities. We find that property is not very responsive to variation in tax rates, whereas business profits respond significantly. While this would suggest that property should be taxed at a higher rate, the data show that this not the case: most municipalities impose relatively higher rates on business profits. This suggests that municipality-level taxation in Germany is inconsistent with the inverse-elasticity rule. We provide suggestive evidence that this finding is explained by politician's imprecise expectations about revenue elasticities as well as re-election concerns.

Keywords: Inverse-elasticity rule, Property taxes, Business taxes, Municipality-level taxation, Elasticity of Corporate Taxable Income

JEL Classification: H2, H3, H7, R5

Suggested Citation

Blesse, Sebastian and Doerrenberg, Philipp and Rauch, Anna, Higher Taxes on Less Elastic Goods? Evidence from German Municipalities (September 1, 2018). ZEW - Centre for European Economic Research Discussion Paper No. 18-039. Available at SSRN: https://ssrn.com/abstract=3251730 or http://dx.doi.org/10.2139/ssrn.3251730

Sebastian Blesse (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

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

Philipp Doerrenberg

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 71
D-68034 Mannheim, 68034
Germany

IZA Institute of Labor Economics ( email )

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

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

Anna Rauch

Independent

No Address Available

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