Fiscal Equalization as a Driver of Tax Increases: Empirical Evidence from Germany

39 Pages Posted: 31 Oct 2018

See all articles by Thiess Büttner

Thiess Büttner

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; Ludwig Maximilian University of Munich (LMU)

Manuela Krause

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

Date Written: 2018

Abstract

This paper exploits a recent devolution of tax setting powers in the German federation to study the effects of fiscal equalization on subnational governments’ tax policy. Based on an analysis of the system of fiscal equalization transfers, we argue that the redistribution of revenues provides incentives for states to raise rather than to lower their tax rates. The empirical analysis exploits differences in fiscal redistribution among the states and over time. Using a comprehensive simulation model, the paper computes the tax-policy incentives faced by each state over the years and explores their empirical effects on tax policy. The results support significant and substantial effects. Facing full equalization a state is predicted to set the tax rate from the real estate transfer tax about 1.3 percentage points higher than without. Our analysis also shows that the incentive to raise tax rates is proliferated by the equalization system because the states’ decisions to raise their tax rates have intensified fiscal redistribution over time.

Keywords: fiscal equalization, tax autonomy, real estate transfer tax

JEL Classification: H770, H240, R380

Suggested Citation

Büttner, Thiess and Krause, Manuela, Fiscal Equalization as a Driver of Tax Increases: Empirical Evidence from Germany (2018). CESifo Working Paper No. 7260, Available at SSRN: https://ssrn.com/abstract=3275436 or http://dx.doi.org/10.2139/ssrn.3275436

Thiess Büttner (Contact Author)

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

Poschinger Str. 5
Munich, 01069
Germany

Ludwig Maximilian University of Munich (LMU)

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Manuela Krause

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

Poschinger Str. 5
Munich, 01069
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
27
Abstract Views
427
PlumX Metrics