Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany

41 Pages Posted: 18 Apr 2007

See all articles by Peter H. Egger

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Marko Koethenbuerger

ETH Zurich - Department of Management, Technology and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 2007

Abstract

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

Egger, Peter H. and Koethenbuerger, Marko and Smart, Michael, Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany (March 2007). CESifo Working Paper Series No. 1955, Available at SSRN: https://ssrn.com/abstract=981112

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

Poschingerstr. 5
Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

HOME PAGE: http://www.cesifo-group.de/portal/page?_pageid=36,425628&_dad=portal&_schema=PORTAL

Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

Marko Koethenbuerger (Contact Author)

ETH Zurich - Department of Management, Technology and Economics ( email )

Leonhardstrasse 21
Zurich, 8092
Switzerland
+41 44 6325446 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Smart

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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