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Tax mimicking in the short- and long-run: Evidence from German reunification

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  • Baskaran, Thushyanthan
Abstract
This paper uses the quasi-experiment of Germany´s reunification to identify local tax mimicking by municipalities in Eastern-Germany. After reunification, East-German municipalities were allowed to independently set, for the first time in decades, local business and property tax rates. I explore whether the tax rates chosen by East-German border municipalities were influenced by the tax rates of adjacent West-German municipalities. To obtain causal estimates, I rely on instrumental variables regressions within the spatial lag framework, using West-German border municipalities - tax rates in 1989 as instruments for their post-reunification tax rates. The results suggest that East-German municipalities mimicked business tax rates immediately after reunification, but not in later years. I find no evidence of mimicking for property taxes. These results indicate that mimicking is not an important determinant of local tax policy.

Suggested Citation

  • Baskaran, Thushyanthan, 2015. "Tax mimicking in the short- and long-run: Evidence from German reunification," University of Göttingen Working Papers in Economics 230, University of Goettingen, Department of Economics.
    • Handle: RePEc:zbw:cegedp:230
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    2. Luisa Dörr & Stefanie Gäbler, 2020. "Does Highway Accessibility Influence Local Tax Factors? Evidence from German Municipalities," ifo Working Paper Series 321, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    3. Zareh Asatryan & Annika Havlik & Frank Streif, 2017. "Vetoing and inaugurating policy like others do: evidence on spatial interactions in voter initiatives," Public Choice, Springer, vol. 172(3), pages 525-544, September.
    4. Streif, Frank, 2015. "Tax competition in Europe: Europe in competition with other world regions?," ZEW Discussion Papers 15-082, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    tax mimicking; business taxes; property taxes; German reunification;
    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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