Tax and the City - A Theory of Local Tax Competition and Evidence for Germany

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp12005.pdf Non-technical summaryIn this paper we use survey responses of mayors from cities and municipalities in the German state of Baden-Württemberg to study the "true" spatial structure of local tax competition. The size of the jurisdiction and, in particular, its economic function turn out to be the important determinants of the decision-maker's perception of the intensity of competition. In particular, respondents from urban centres perceive a much higher intensity of competition for firms with respect to competing jurisdictions which are distant or even located in other countries. Our empirical findings confirm the assumption of the empirical literature about the importance of neighbourhood competition, but it also shows that another important factor is missing. In particular, the assumption of the empirical literature that competition takes place only among neighbours is at odds with the theoretical approaches where all jurisdictions compete simultaneously. The existing standard models, however, are incapable of explaining the empirical particularities of local competition.These empirical findings motivate our sequential tax competition model which considers a rich competition structure. Essentially, we assume a number of metropolitan regions which each consist of one city centre and a number of surrounding (rural) jurisdictions.The model has two levels of competition for mobile capital: first, cities simultaneously compete for mobile capital by setting their tax policies (which can be interpreted as competition for large scale investments, such as headquarters); second, rural areas compete simultaneously for capital within their metropolitan area (which corresponds to the neighbourhood competition).We are especially interested in the effects of a rise in the number of metropolitan regions, which represents the increase in external competition, for example through globalisation, Eastern enlargement of the EU or German unification. It is shown thatsimilarly to standard models -the capital tax rates of the cities converge to zero, but they stay positive for the hinterlands. Moreover, cities are more affected by an increase in external competition than hinterlands, since they reduce capital tax rates more and shift more from mobile capital to immobile labour taxation. In contrast to existing models, our results imply that larger jurisdictions do not necessarily rely mor...

Borders as Boundaries to Fiscal Policy Interactions? An Empirical Analysis of Politicians’ Opinions on Rivals in the Competition for Firms

“…We test this prediction by using the difference between the collection rates of both taxes (i.e., ) as the dependent variable . This comparative measure is used to eliminate effects arising from different expenditure pressures across jurisdictions which affect the levels of all taxes (see Janeba and Osterloh, , for a more detailed discussion). As can be seen from column 1 of Table , the results are in line with this prediction.…”

“…We also confirm that decision-makers of highly agglomerated cities perceive competitive pressures to come relatively more from extraregional municipalities. This reflects that they are generally more exposed to external competition from more distant cities (see also Janeba and Osterloh, 2012). Neither the local unemployment rate nor the population of working age plays a significant role in politicians' perceptions.…”

“…Consequently, if politicians in municipalities located close to an (inter)national border perceive somewhat lower competitive pressure from within their own state (possibly due to a lower number of in-state neighbors; see above) and simultaneously perceive substantial, albeit imperfect, protection from competitors across the (inter)national border (due to the "border effect" see above), a close connection between politicians' beliefs and actions should translate into We test this prediction by using the difference between the collection rates of both taxes (i.e., taxgap = businesstax-landtax) as the dependent variable. 13 This comparative measure is used to eliminate effects arising from different expenditure pressures across jurisdictions which affect the levels of all taxes (see Janeba and Osterloh, 2012, for a more detailed discussion). As can be seen from column 1 of Table 3 , the results are in line with this prediction.…”

Competition and Subnational Governments: Tax Competition, Competition in Urban Areas, and Education Competition

“…Annexation or amalgamation is an exception where geographic borders become a policy choice(Reingewertz, 2012). School district border changes may occur with mergers(Gordon and Knight, 2009).26 Janeba and Osterloh (2013) present survey results that indicate the nearest municipalities perceive each other as important competitors.…”

A Propensity to Tax Competition

“…Jednakże, co potwierdzają wyniki szeregu badań empirycznych [Carbonnier 2013;Janeba, Osterloh 2013], wielkość jednostki terytorialnej ma również wpływ na postrzeganie przez nią korzyści wynikających z konkurencji podatkowej: mniejsze jednostki terytorialne, w przeciwieństwie do dużych miast, w mniejszym stopniu skłonne są angażować się w konkurencję o kapitał, co określa się jako zjawisko asymetrycznej podatkowej konkurencji; równocześnie duże jednostki terytorialne w większym stopniu narażone są na konkurencję z innymi dużymi jednostkami, także położonymi w odległych miejscach. Tak więc w przypadku małych jednostek terytorialnych konkurencja jest w większym stopniu lokalna (konkurują jednostki geograficznie blisko siebie położone) oraz koncentruje się na konkurencji podatkowej w zakresie opodatkowania pracy.…”