The Incentive Effect of Fiscal Equalization Transfers on Tax Policy
By Thiess Buettner. Social Science Research Network, 2006
331 citations recorded by the source corpus.
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.
Subfields: Accounting, Economics and Econometrics, Political Science and International Relations
View Paper: https://www.semanticscholar.org/paper/cc032e16df6f7024bac86ed2182388760687109d
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Citations in the corpus
- Competing in Taxes and Investment under Fiscal Equalization (2008, background): “Indeed, (7) implies that t∗ = δ/2 and g∗ = δ are the symmetric baseline equilibrium in taxes and public investments.”
- Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany (2010, neutral): “The magnitude of the effect appears to be roughly comparable to that estimated in the most closely related previous study, Buettner (2006). Buettner's estimates imply that a 10% point increase in the marginal contribution rate of the transfer system—the parameter α in the theoretical model of Sectio”