Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany

39 Pages Posted: 10 Mar 2006 Last revised: 26 Aug 2008

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; CESifo (Center for Economic Studies and Ifo Institute)

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Robert Schwager

Center for European Economic Research (ZEW); University of Magdeburg

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

Recent literature has emphasized that redistributive grant systems may tend to internalize fiscal externalities arising from tax competition. This paper further explores the conditions under which local grant systems enforced by the state government will enhance efficiency. A system of redistributive grants among governments is introduced into a standard model of tax competition. This basic model is then extended in order to allow for variations in the government objectives at the state level. A subsequent empirical analysis of local tax policy exploits the experience with local fiscal revenue sharing in Germany. The results suggest that attempts of state level governments to extract fiscal resources from the local revenue sharing system exert an upward pressure on tax rates.

Keywords: Fiscal Equalization, Tax Competition, Fiscal Federalism

JEL Classification: H71, H77

Suggested Citation

Buettner, Thiess and Hauptmeier, Sebastian and Schwager, Robert, Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany (March 2006). ZEW - Centre for European Economic Research Discussion Paper No. 06-013, Available at SSRN: https://ssrn.com/abstract=888704 or http://dx.doi.org/10.2139/ssrn.888704

Thiess Buettner (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany

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

Poschinger Str. 5
Munich, DE-81679
Germany

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Robert Schwager

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany
00 49 621 1235160 (Phone)
00 49 621 1235215 (Fax)

University of Magdeburg

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

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