The incentive effect of fiscal equalization transfers on tax policy

A theoretical analysis considers the impact of a typical system of redistributive ?fiscal equalization? transfers on the taxing effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax base. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to raise their business tax rates significantly.

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Year of publication:	2005
Authors:	Buettner, Thiess
Publisher:	Munich : Center for Economic Studies and Ifo Institute (CESifo)
Subject:	Gemeindesteuer \| Steuerwettbewerb \| Finanzföderalismus \| Steuerbemessung \| Deutschland \| fiscal equalization \| tax competition \| fiscal federalism \| incentive effect of taxation \| regression discontinuity

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Series:	CESifo Working Paper ; 1404
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	479304416 [GVK] hdl:10419/18768 [Handle]
Classification:	H77 - Intergovernmental Relations; Federalism ; H71 - State and Local Taxation, Subsidies, and Revenue
Source:	EconStor