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The revenue and base effects of local tax hikes: Evidence from a quasi-experiment

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  • Baskaran, Thushyanthan

Abstract

This paper studies the revenue and base effects of local property and business tax hikes using a natural experiment in the German state of North Rhine-Westphalia (NRW). Due to a reform of the local equalization scheme in 2003, a set of municipalities in NRW increased their local tax rates by one to two percentage points while the remaining municipalities kept their rates constant. Using this variation across municipalities and over time to implement a difference-in-differences design covering the period 1995-2010, I find that property tax hikes have a revenue elasticity of unity and no adverse base effects. Business tax hikes have no discernible base effects but also no statistically significant effect on revenues. Furthermore, the results suggest that the tax hikes have no effect on broader economic outcomes such as local employment, firms´ wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.

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  • Baskaran, Thushyanthan, 2015. "The revenue and base effects of local tax hikes: Evidence from a quasi-experiment," University of Göttingen Working Papers in Economics 257, University of Goettingen, Department of Economics.
    • Handle: RePEc:zbw:cegedp:257
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    Cited by:

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    2. 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.

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    More about this item

    Keywords

    tax hikes; tax base effects; local business taxes; local property taxes;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • 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

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