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How to stop the race to the bottom

Author

Listed:
  • Anna Rauch

    (University of Cologne)

  • Caroline-Antonia Hummel

    (University of Cologne)

Abstract

Standard tax multipliers are a widespread feature of fiscal equalization systems. A simple theoretical model shows that actual tax multipliers respond positively to changes in standard tax multipliers. This theoretical prediction is tested empirically using data on municipalities in Germany. A quasi-experiment in the state of North Rhine-Westphalia is exploited to identify the incentive effect. The empirical results confirm that local business tax policy is shaped by standard tax multipliers. They provide a straightforward practical tool to avoid a race to the bottom in local business tax rates.

Suggested Citation

  • Anna Rauch & Caroline-Antonia Hummel, 2016. "How to stop the race to the bottom," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(5), pages 911-933, October.
    • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:5:d:10.1007_s10797-015-9387-7
    DOI: 10.1007/s10797-015-9387-7
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    References listed on IDEAS

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    1. Thushyanthan Baskaran, 2021. "The revenue and base effects of local tax hikes: evidence from a quasi-experiment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1472-1518, December.
    2. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February.
    3. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, January.
    4. Michael Smart, 2007. "Raising taxes through equalization," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1188-1212, November.
    5. Egger, Peter & Koethenbuerger, Marko & Smart, Michael, 2010. "Do fiscal transfers alleviate business tax competition? Evidence from Germany," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 235-246, April.
    6. Michael Smart, 2007. "Raising taxes through equalization," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(4), pages 1188-1212, November.
    7. Ringa Raudla, 2010. "Governing budgetary commons: what can we learn from Elinor Ostrom?," European Journal of Law and Economics, Springer, vol. 30(3), pages 201-221, December.
    8. Thiess Büttner & Fédéric Holm-Hadulla & Rüdiger Parsche & Christiane Starbatty, 2008. "Analyse und Weiterentwicklung des kommunalen Finanzausgleichs in Nordrhein-Westfalen," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 41, July.
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    Citations

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    Cited by:

    1. Löffler, Max & Siegloch, Sebastian, 2015. "Property Taxation, Local Labor Markets and Rental Housing," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112967, Verein für Socialpolitik / German Economic Association.
    2. Holm-Hadulla, Fédéric, 2020. "Fiscal equalization and the tax structure," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    3. Thiess Buettner & Manuela Krause, 2021. "Fiscal equalization as a driver of tax increases: empirical evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(1), pages 90-112, February.
    4. Tim Scheurer, 2024. "Anreizwirkungen im kommunalen Finanzausgleich Sachsens: Die Kreisumlage im Fokus," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 31(03), pages 14-18, June.
    5. Mutsumi Matsumoto, 2022. "Tax competition and tax base equalization in the presence of multiple tax instruments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(5), pages 1213-1226, October.

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    More about this item

    Keywords

    Fiscal equalization; Quasi-experiment; Local taxation; Business tax; Fiscal competition;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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