Abstract
For decades, the German local business tax has been criticised by both economists and politicians. But none of the reform proposals has been realised until now. In this paper we analyse the existing local business tax as well as the most popular reform proposals. They include taxes on value added and a local surcharge on the personal income tax and corporate income tax. Our analysis is based on the economic criteria decision neutrality and tax planning and compliance costs. In the second section we analyse the Austrian local business tax which has been abolished successfully in 1993 and has been replaced by a payroll tax. We show that the employment has not decreased due to the payroll tax. The municipal tax revenue has developed more constant compared to the one of the local business tax. Overall, we find a number of arguments in favour of a payroll tax as in Austria, or even better, a surcharge on personal and corporate income taxes, for financing municipalities in Germany.
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