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Tax and the city: A theory of local tax competition and evidence for Germany

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  • Janeba, Eckhard
  • Osterloh, Steffen
Abstract
Despite the well-developed empirical literature on local tax competition, little is known about the actual spatial structure of inter-municipal competition. Assuming that competition takes place only among neighbours (as in the empirical literature) is at odds with the theoretical approaches where all jurisdictions compete simultaneously. In this paper we use a survey conducted among mayors in the German state of Baden-Württemberg to show that the perceived intensity of competition for firms varies considerably between jurisdictions and can mainly be explained by the size and location of the jurisdiction. Based on these findings, we develop a sequential tax competition model in which urban centres compete with other urban centres and rural jurisdictions in their own neighbourhood. This model predicts that larger jurisdictions do not necessarily rely more on capital taxes; in case they face strong competition with more distant competitors, larger cities even have lower capital taxes. In addition, we discuss how the model compares to a standard simultaneous approach and show that results from our sequential model are in line with trends in local taxation in Baden-Württemberg.

Suggested Citation

  • Janeba, Eckhard & Osterloh, Steffen, 2012. "Tax and the city: A theory of local tax competition and evidence for Germany," ZEW Discussion Papers 12-005, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:12005
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    References listed on IDEAS

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    2. Ivo Bischoff & Stefan Krabel, 2017. "Local taxes and political influence: evidence from locally dominant firms in German municipalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 313-337, April.
    3. Tidiane Ly, 2018. "Sub-metropolitan tax competition with household and capital mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1129-1169, October.
    4. Matthieu Chtioui Cepn & Nadine Levratto, 2020. "Fiscalité locale et dynamique d'emploi des territoires : analyse empirique sur les communes françaises (Version preprint) A paraitre dans la Revue d'Economie Régionale et urbaine, 2021," Working Papers halshs-02901499, HAL.
    5. Gaigné, Carl & Riou, Stéphane & Thisse, Jacques-François, 2016. "How to make the metropolitan area work? Neither big government, nor laissez-faire," Journal of Public Economics, Elsevier, vol. 134(C), pages 100-113.
    6. Mariana Lopes da Fonseca, 2017. "Tax Mimicking in Local Business Taxation: Quasi-experimental Evidence from Portugal," Working Papers tax-mpg-rps-2017-08, Max Planck Institute for Tax Law and Public Finance.
    7. 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.
    8. Clemens Fuest & Andreas Peichl & Sebastian Siegloch, 2018. "Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany," American Economic Review, American Economic Association, vol. 108(2), pages 393-418, February.
    9. Borck, Rainald & Fossen, Frank M. & Freier, Ronny & Martin, Thorsten, 2015. "Race to the debt trap? — Spatial econometric evidence on debt in German municipalities," Regional Science and Urban Economics, Elsevier, vol. 53(C), pages 20-37.
    10. Pete Maniloff & Dale T. Manning, 2015. "Division of Nonrenewable Resource Rents: A Model of Asymmetric Nash Competition with State Control of Heterogeneous Resources," Working Papers 2015-08, Colorado School of Mines, Division of Economics and Business.
    11. Hayato Kato & Hirofumi Okoshi, 2022. "Economic Integration And Agglomeration Of Multinational Production With Transfer Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1325-1355, August.
    12. Fuest, Clemens & Peichl, Andreas & Siegloch, Sebastian, 2015. "Do Higher Corporate Taxes Reduce Wages?," IZA Discussion Papers 9606, Institute of Labor Economics (IZA).
    13. Herrmann-Pillath, Carsten & Libman, Alexander & Yu, Xiaofan, 2014. "Economic integration in China: Politics and culture," Journal of Comparative Economics, Elsevier, vol. 42(2), pages 470-492.
    14. Benny Geys & Steffen Osterloh, 2013. "Borders As Boundaries To Fiscal Policy Interactions? An Empirical Analysis Of Politicians’ Opinions On Rivals In The Competition For Firms," Journal of Regional Science, Wiley Blackwell, vol. 53(4), pages 583-606, October.
    15. von Schwerin, Axel & Buettner, Thiess, 2016. "Constrained Tax Competition – Empirical Effects of the Minimum Tax Rate on the Tax Rate Distribution," VfS Annual Conference 2016 (Augsburg): Demographic Change 145642, Verein für Socialpolitik / German Economic Association.
    16. Janeba, Eckhard & Osterloh, Steffen, 2013. "Tax and the city — A theory of local tax competition," Journal of Public Economics, Elsevier, vol. 106(C), pages 89-100.
    17. Johan Lundberg, 2021. "Horizontal interactions in local personal income taxes," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 67(1), pages 27-46, August.
    18. Feld, Lars P. & Frey, Christian & Schaltegger, Christoph A. & Schmid, Lukas A., 2021. "Fiscal federalism and income inequality: An empirical analysis for Switzerland," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 463-494.
    19. Holger Kächelein, 2014. "Asymmetric capital tax competition and choice of tax rate," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(1), pages 50-65, February.
    20. Carsten Eckel & Yutao Han & Kate Hynes & Jin Zhang, 2021. "Structural fund, endogenous move and commitment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(2), pages 465-482, April.
    21. Yu, Jihai & Zhou, Li-An & Zhu, Guozhong, 2016. "Strategic interaction in political competition: Evidence from spatial effects across Chinese cities," Regional Science and Urban Economics, Elsevier, vol. 57(C), pages 23-37.
    22. Streif, Frank & Heinemann, Friedrich & Janeba, Eckhard & Schröder, Christoph, 2013. "Will the German Debt Brake Succeed? Survey Evidence from State Politicians," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80044, Verein für Socialpolitik / German Economic Association.
    23. Swianiewicz Paweł & Łukomska Julita, 2016. "Local Tax Competition in Poland?," Miscellanea Geographica. Regional Studies on Development, Sciendo, vol. 20(3), pages 37-43, September.

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    More about this item

    Keywords

    local tax competition; survey; intensity of competition; asymmetric tax competition;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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