Business taxes and the electoral cycle

The purpose of this paper is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the German local business tax as a testing ground which is set autonomously by German municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting behavior as the growth rate of the local business tax is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks. --local business tax choice,political economy,election cycle

Business Taxes and the Electoral Cycle

The purpose of this paper is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the German local business tax as a testing ground which is set autonomously by German municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting behavior as the growth rate of the local business tax is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks.local business tax choice, political economy, election cycle

Business taxes and the electoral cycle

The purpose of this paper is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the German local business tax as a testing ground which is set autonomously by German municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting behavior as the growth rate of the local business tax is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks.Local business tax choice, political economy, election cycle

Essays in Empirical Public Finance

This thesis consists of three empirical contributions – each of them concerned with aspects of public finances at the sub-national level in the European Union. Chapter 1 offers an empirical answer to the question of which institutional arrangements can help to keep the accounts of sub-national governments in balance. I take into consideration the autonomy that these governments have in raising their revenues and fiscal rules as formulated in law or constitutions. The former works as an implicit constraint since governments with more autonomy might assume higher responsibility for accumulated deficits. The latter works as a direct explicit constraint on sub-national borrowing, but might be subject to endogeneity through preferences for fiscal responsibility. This potential source of bias is taken into account by using IV techniques for fiscal rules. Results from my original dataset, covering full information for 14 years of all EU15 countries, show that the effectiveness of tools depends critically on the federal background. Fiscal rules work in unitary countries, while higher tax autonomy yields lower deficits in federations. The purpose of chapter 2 is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the information on the German local business tax which is set autonomously by municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting as the change in local business tax rates is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks. Chapter 3 contributes to the literature on local tax interactions. Its novelty lies in its focus on the interactions of local governments across national borders. We use panel data for the French and German municipalities in the Rhine Valley for the period 2000–2007. The local governments of each country influence firms’ overall tax burdens, but the tax instruments available at the local level differ. We estimate panel models that distinguish between the effects of competing municipalities belonging to the same country and belonging to the other country. Our empirical model shows that local jurisdictions along borders choose their business tax rates based on those of their domestic neighbors and that foreign fiscal policy does not have an impact on the local domestic tax setting behavior in these contexts

Business taxes and the electoral cycle [WP]

The purpose of this paper is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the German local business tax as a testing ground which is set autonomously by German municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting behavior as the growth rate of the local business tax is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks

¿Se escapan los ricos cuando las comunidades autónomas les suben los impuestos?

Periódicamente salta la noticia de algún famoso que decide cambiar su residencia para pagar menos impuestos. Por ejemplo, hace unos años el actor francés Gérard Depardieu decidió mudarse a Rusia para evitar el llamado impuesto de los millonarios, que subía al 75% el tipo marginal que pagaban los residentes en Francia con ingresos superiores al millón de euros

Fiscal Decentralisation and Mobility: Evidence from Spain's Income Tax System

In recent decades, many countries around the world have become more fiscally decentralised. Spain provides a unique case study given it has relatively quickly transitioned from a highly centralised country to a much more decentralised country, although formally not a federation. As part of this decentralisation, autonomy over individual income tax rates and brackets was recently granted to the regions (Autonomous Communities), which are similar to states or provinces in other countries. In the early 2000s, individual income tax brackets and rates were the purview of the central government. Only recently were the Spanish regions granted the authority to levy their own individual income tax rates on a portion of the personal income tax base. Once granted this authority, marginal tax rates diverged substantially at the top of the income distribution, resulting in substantial tax differentials across various regions within Spain. This article reviews the economic consequences of Spanish fiscal decentralisation with a particular focus on the impact on the mobility of high-income individuals and the implications of migration decisions for public finances

Fiscal Decentralisation and Mobility: Evidence from Spain's Income Tax System

In recent decades, many countries around the world have become more fiscally decentralised. Spain provides a unique case study given it has relatively quickly transitioned from a highly centralised country to a much more decentralised country, although formally not a federation. As part of this decentralisation, autonomy over individual income tax rates and brackets was recently granted to the regions (Autonomous Communities), which are similar to states or provinces in other countries. In the early 2000s, individual income tax brackets and rates were the purview of the central government. Only recently were the Spanish regions granted the authority to levy their own individual income tax rates on a portion of the personal income tax base. Once granted this authority, marginal tax rates diverged substantially at the top of the income distribution, resulting in substantial tax differentials across various regions within Spain. This article reviews the economic consequences of Spanish fiscal decentralisation with a particular focus on the impact on the mobility of high-income individuals and the implications of migration decisions for public finances

Vertical aspects of sub-national deficits: the impact of fiscal rules and tax autonomy in European countries

This article offers an empirical answer to the question of which institutional arrangements can help to keep the accounts of sub-national governments in balance. I take into consideration the autonomy that these governments have in raising their revenues and fiscal rules as formulated in law or constitutions. The former works as an implicit constraint since governments with more autonomy might assume higher responsibility for accumulated deficits. The latter works as a direct explicit constraint on sub-national borrowing, but might be subject to endogeneity through preferences for fiscal responsibility. This potential source of bias is taken into account by using IV techniques for fiscal rules. Results from my original dataset, covering full information for 14 years of all EU15 countries, show that the effectiveness of tools depends critically on the federal background. Fiscal rules work in unitary countries, while higher tax autonomy yields lower deficits in federations

Sub-national deficits in European countries: The impact of fiscal rules and tax autonomy

This paper empirically examines how fiscal rules and tax autonomy influence deficits of sub-national sectors across European countries. I use a new panel-data set to measure tax autonomy and the stringency of fiscal rules for EU15 regional and local government sectors over the period 1995 to 2008. I apply an instrumental variables approach to obtain an unbiased estimate of the impact of fiscal rules on deficits. I use political variables describing the central governments characteristics as instruments for fiscal rules at the sub-national level. The results show that the effectiveness of fiscal rules and tax autonomy depends on the constitutional structure. Fiscal rules decrease deficits only in unitary countries. Deficits of sub-national sectors in federations can be avoided through tax autonomy