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Holzmann, Carolin
von Schwerin, Axel
Year of Publication: 
Series/Report no.: 
IWQW Discussion Papers 14/2015
This paper provides empirical evidence for interdependence of jurisdictions' tax policies. We study tax policy interdependence between municipalities in the economically integrated European Metropolitan Area Frankfurt/Rhein-Main, that spreads across two German states, Hesse, and Rhineland-Palatinate. For empirical identification, we exploit two reforms in the Hessian local fiscal equalization scheme in the 1990s that induced quasi-experimental variation in Hessian metropolitan municipalities' business tax rates. In response to the Hessian metropolitan municipalities' tax rate increase, Rhineland-Palatine metropolitan municipalities increase their local business tax rates more moderately as compared to a matched control group of Rhineland-Palatine non-metropolitan municipalities. We argue that primarily tax competition considerations drive the results, as the average tax-rate differential between metropolitan municipalities in Rhineland-Palatinate and Hesse stays stable during the analysis period. We conclude that an arguably strong economic integration of municipalities seems a key determinant for the interdependence of their tax policies.
fiscal interdependence
tax mimicking
local business tax
tax competition
fiscal equalization schemes
Document Type: 
Working Paper

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