Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/185458 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 7260
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper exploits a recent devolution of tax setting powers in the German federation to study the effects of fiscal equalization on subnational governments’ tax policy. Based on an analysis of the system of fiscal equalization transfers, we argue that the redistribution of revenues provides incentives for states to raise rather than to lower their tax rates. The empirical analysis exploits differences in fiscal redistribution among the states and over time. Using a comprehensive simulation model, the paper computes the tax-policy incentives faced by each state over the years and explores their empirical effects on tax policy. The results support significant and substantial effects. Facing full equalization a state is predicted to set the tax rate from the real estate transfer tax about 1.3 percentage points higher than without. Our analysis also shows that the incentive to raise tax rates is proliferated by the equalization system because the states’ decisions to raise their tax rates have intensified fiscal redistribution over time.
Subjects: 
fiscal equalization
tax autonomy
real estate transfer tax
JEL: 
H77
H24
R38
Document Type: 
Working Paper
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