Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/18768 
Year of Publication: 
2005
Series/Report no.: 
CESifo Working Paper No. 1404
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
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.
Subjects: 
fiscal equalization
tax competition
fiscal federalism
incentive effect of taxation
regression discontinuity
JEL: 
H77
H71
Document Type: 
Working Paper
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