Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75830
Year of Publication: 
2001
Series/Report no.: 
CESifo Working Paper No. 440
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
A theoretical model describes the local choice of the tax rate on capital income. It establishes preferences and various fiscal conditions - including the tax rates of competing jurisdictions - as determinants of the tax rate. The empirical implications are tested using a large panel of jurisdictions in Germany, which have discretion in setting the local rate of the business tax. Tax competition is identified by means of instrumental variables techniques. Despite significant competition effects between local neighbors, where tax rates are strategic complements, jurisdictions are found to have some leeway in using the tax rate as an instrument of their policy. In particular, large jurisdictions set higher tax rates in interjurisdictional competition.
Subjects: 
Local public finance
tax competition
instrumental variables
spatial econometrics
business taxation
Document Type: 
Working Paper
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