Intergovernmental fiscal transfers and tax efforts: Regression-discontinuity analysis for Japanese local governments

The present study examines the incentive effects of fiscal equalization transfers on local corporate tax rates from theoretical and empirical perspectives. The study focuses on additional corporate tax on capital, which is exempt from calculations of equalization grants. A theoretical investigation reveals that a rise in equalization rate increases additional capital tax rates. The theoretical prediction is empirically examined using panel data of Japanese municipalities for 1990–2000. It is found that a higher equalization rate in fiscal equalizing transfers gives municipalities an incentive to raise corporate tax rates exempt from the transfer scheme.