Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany
41 Pages Posted: 18 Apr 2007
Date Written: March 2007
The paper empirically analyzes the incentive effects of equalizing transfers on business tax policy by exploiting a natural experiment in the state of Lower Saxony which changed its equalization formula as of 1999. We resort to within-state and across-state difference-in-difference estimates to identify the reform effect on municipalities' business tax rates. Confirming the theoretical prediction, the reform had a significant impact on the municipalities' tax policy in the four years after the reform with a "phasing out" of the effect starting in the fourth to fifth year. The finding is robust to various alternative specifications.
Keywords: equalization grants, tax competition, local public finance, fiscal capacity equalization
JEL Classification: H71, H25
Suggested Citation: Suggested Citation