Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison

A large panel of German municipalities is employed in order to investigate the dynamic fiscal policy adjustment of local jurisdictions using a VEC model which explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of adjustment takes place by offsetting changes in intergovernmental transfers, in particular, in ‘fiscal equalization’ transfers: in present value terms about 34 cents of a one euro decrease in own revenue is compensated by subsequent changes in equalization transfers. The contribution of intergovernmental transfers to restoring fiscal balance, therefore, is about two to three times higher, compared to the case of US municipalities investigated by Buettner and Wildasin (2006). Nevertheless, budget components such as own revenues and general expenditures display larger fluctuations in the German case. This is consistent with the view that fiscal equalization transfers create a moral-hazard problem.Fiscal balance; Intergovernmental transfers; Local governments; Fiscal equalization

Improvements and Future Challenges for the Research Infrastructure in Public Finance

The paper briefly surveys available data sources and discusses future developments relevant for empirical public finance in Germany. It starts from the notion that public finance deals with decisions of various agents, not only governments, but also private households and firms. Therefore, empirical research needs different types of data. Government decisions are to some extent captured in terms of the budgetary statistics, even though these statistics have shortcomings with regard to the quality of public service provisions and the revenue instruments. To study the decisions of the other agents individual level data is required. While some progress has been made, recently, the combination of various datasets at the individual level is a key priority.Empirical Research; Public Finance; Budgetary Statistics; Revenue Statistics; Micro-level Data; Taxpayer Data

The impact of taxes and public spending on the location of FDI: evidence from FDI-flows within Europe

In a place to place analysis of bilateral FDI flows the average company tax burden, the statutory corporation tax rate, as well as the cost of capital are used to capture the tax incentives. In addition, indicators of public spending in general and with regard to different functions of government and rankings of competitiveness related to public sector activities are used to measure the role of public service provision. The results show significant effects of tax incentives, in particular, the marginal tax burden and the statutory tax rate prove jointly significant. However, only weak indications of a countervailing effect of public expenditures are found. --

Local Determinants of Crime: Distinguishing Between Resident and Non-resident Offenders

The paper explores the differences in the empirical determinants of crime using a spatial model which distinguishes resident and non-resident offenders. Using data for German municipalities, the model is estimated by means of a spatial GMM approach, where the local property value is instrumented by a couple of amenity variables. The results show that aside of the local property value several local population characteristics, such as income, poverty, inequality, unemployment, family disruption, and citizenship have the expected effects on crime committed by resident offenders. However, crime committed by non-resident offenders is shown to be significantly related to the conditions in adjacent municipalities as captured by spatial lags of population characteristics.

Fiscal Externalities in Local Tax Competition: Empirical Evidence from a Panel of German Jurisdictions

This paper is concerned with fiscal externalities arising from local taxation of a mobile factor. Using a panel of more 1100 local jurisdictions it provides empirical evidence on how the local tax rate as well as the tax rate in the neighborhood affect the local tax base. The results support the existence of fiscal externalities: an increase in the tax rate of local neighbors exerts a positive effect on the tax base whereas an increase of the own tax rate has a negative effect, and a joint increase of the tax rate at the local jurisdiction and in its neighborhood has no significant effect on the interjurisdictional distribution of the tax base. However, in the considered case tax competition is alleviated by revenue sharing rules which reduce the jurisdictions' incentive to lower tax rates in order to attract capital

The Impact of Taxes and Public Spending on the Location of FDI: Evidence from FDI-flows within Europe

In a place to place analysis of bilateral FDI flows the average company tax burden, the statutory corporation tax rate, as well as the cost of capital are used to capture the tax incentives. In addition, indicators of public spending in general and with regard to different functions of government and rankings of competitiveness related to public sector activities are used to measure the role of public service provision. The results show significant effects of tax incentives, in particular, the marginal tax burden and the statutory tax rate prove jointly significant. However, only weak indications of a countervailing effect of public expenditures are found

The Role of the Corporate Income Tax as an Automatic Stabilizer

This paper analyses the effectiveness of the corporate income tax as an automatic stabilizer. It employs a unique firm-level dataset of German manufacturers combining financial statements with firm-specific information about credit market restrictions. The results show that approximately 20 per cent of all firms report both positive taxable income and capital market restrictions. Taking account of the income tax rates and the size differences of the firms, we find that demand stabilization through the corporate income tax amounts to about 8 per cent of an initial shock to gross revenues. This stabilization effect varies over the business cycle and tends to increase during cyclical downturns.corporate income tax, stabilization, capital market restrictions, loss offset, firm-level data

Tax incentives and the location of FDI: evidence from a panel of German multinationals

Using a firm-level dataset this paper investigates the impact of taxation on the decision of German multinationals to hold direct investments in other European countries or abroad. Controlling for firm-specific differences in the valuation of potential locations, the results confirm significant effects of tax incentives, market size, and of labor cost on cross-border location decisions. In accordance with Devereux and Griffith (1998) we find that the marginal tax rate has no predictive power for location decisions whereas effective average and statutory tax rates exert significant effects. In particular, the statutory tax rate has strong predictive power for the likelihood of direct investment holdings at a location. The results indicate that an increase in the statutory tax rate by 10 percentage points reduces the odds of observing some positive direct investment by approximately 20 %. --Location,FDI,Taxes,Firm-Level Panel Data,Fixed-Effects Logit Model

Intercompany Loans and Profit Shifting – Evidence from Company-Level Data

This paper is concerned with tax-planning strategies of multinational corporations. A theoretical analysis discusses the choice of the capital structure in a setting where intercompany loans can be used to shift profits to low-tax countries. Empirical evidence is provided using micro-level panel data of virtually all German multinationals made available by the Bundesbank. This comprehensive dataset allows us to exploit differences in taxing conditions of almost eighty countries during a period of nine years. The empirical results confirm a robust impact of tax-rate differences within the multinational group on the use of intercompany loans, supporting the profit-shifting hypothesis. However, the implied tax-revenue effects are rather small, suggesting that costs related to adjusting the capital structure for profit-shifting purposes are substantial.corporate taxation, multination corporations, tax planning, intercompany loans, tax haven, FDI, micro-level data

Revenue Forecasting Practices: Differences across Countries and Consequences for Forecasting Performance

This paper reviews the practice and performance of revenue forecasting in selected OECD countries. While the mean forecast errors are small in most countries, the precision of the forecasts measured by the standard deviation of the forecast error differs substantially across countries. Based on a comparison of forecasting practices we show that these differences can be attributed to a large part to differences in the timing of the forecasts and in the tax structure. In addition, we find some evidence that differences in methods and institutions also matter for the forecasting precision. In particular, we find that the use of macroeconomic models as well as the independence of revenue forecasting are associated with a lower standard deviation of the forecast error.revenue forecasting, international comparison, OECD countries, forecast error