The Revenue and Base Effects of Local Tax Hikes: Evidence from a Quasi-Experiment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may THE REVENUE AND BASE EFFECT OF LOCAL TAX HIKES: EVIDENCE FROM A QUASI-EXPERIMENT Thushyanthan BaskaranThe revenue and base effects of local tax hikes:Evidence from a quasi-experimentThushyanthan Baskaran * thushyanthan.baskaran@gmail.com AbstractThis paper studies the revenue and base effects of local property and business tax hikes using a natural experiment in the German state of North Rhine-Westphalia (NRW). Due to a reform of the local equalization scheme in 2003, a set of municipalities in NRW increased their local tax rates by one to two percentage points while the remaining municipalities kept their rates constant. Using this variation across municipalities and over time to implement a difference-in-differences design covering the period 1995-2010, I find that property tax hikes have a revenue elasticity of unity and no adverse base effects. Business tax hikes have no discernible base effects but also no statistically significant effect on revenues. Furthermore, the results suggest that the tax hikes have no effect on broader economic outcomes such as local employment, firms' wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.

Let's Stay in Touch - Evidence on the Role of Social Learning in Local Tax Interactions

“…Our ndings are consistent with recent quasi-experimental evidence that local tax rate interactions are not a general phenomenon (Baskaran, 2014;Lyytikäinen, 2012;Isen, 2014;Eugster and Parchet, 2011). 4 In particular, we show that there are signicant tax rate interactions but that they are only short-lived and not relevant in the common 3 See Section 2 for a detailed overview of theoretical motives on local tax interactions. 4 Agrawal (2015a) nds horizontal and vertical interactions via local sales tax rates for states in the US by taking state border discontinuities into account.…”

“…Therefore, tax interactions are not a general phenomenon but only reform-induced in the present study. 2 2 Changes in tax rates are often only triggered by reforms of local scal equalization (Baskaran, 2014), changes in minimum tax rates (Lyytikäinen, 2012), integration of new regions into a federation (Baskaran, 2015b) or election dates (Foremny and Riedel, 2014).…”

“…Moreover, we add to a small literature which denes factors that determine tax interactions like cultural borders (Eugster and Parchet, 2011), integration of economic areas (Holzmann and Schwerin, 2015;Baskaran, 2014) or regions (Baskaran, 2015b), metropolitan areas versus periphery (Brueckner and Saavedra, 2001;Kauder, 2014;Charlot and Paty, 2010;Koh, Riedel, and Böhm, 2013), and borders for both states (Geys and Osterloh, 2013;Cassette, Porto, and Foremny, 2012;Baskaran, 2014;Agrawal, 2015b) or nations (Cassette, Porto, and Foremny, 2012), respectively.…”

“…15 An increase in the hypothetical multiplier raises the scal capacity for municipalities with larger tax bases disproportionately. Hence, richer municipalities might transfer more resources to poorer municipalities (Baskaran, 2014(Baskaran, , 2015a. However, the respective amount should be fairly small and thus, not have an eect on actual tax rates.…”

“…Parts of the tax increase can be attributed to the state government to avoid the loss of voter support. Moreover, Baskaran (2014) argues that hypothetical tax rates are means for rms lobbying for lower tax rates in municipalities if actual tax rates exceed this reference rate. Hypothetical tax rates are also important because of the common misbeliefs of local politicians and the local media that even a tax rate that is negligibly lower than the hypothetical rate leads ceteris paribus to direct losses in rule-based transfer payments (DIHK, 2009).…”