Local Business Tax Research Articles

Should professionals and farmers pay local business tax? Taxation issues and empirical analysis

In vielen Landern gibt es kommunale Unternehmensteuern, in Deutschland hat die Gewerbesteuer ein groses Gewicht bei der Gemeindefinanzierung. Wenn solche kommunalen Unternehmensteuern erhoben werden, gibt es keinen steuer- oder wirtschaftspolitischen Grund fur eine Differenzierung zwischen Gewerbebetrieben sowie freien Berufen oder der Land- und Forstwirtschaft. Daher sollten alle Personenunternehmen der Gewerbesteuer unterliegen. Die Aufkommens- und Belastungseffekte einer Einbeziehung von Freiberuflern und Landwirten in die Gewerbesteuer werden mit einem Mikrosimulationsmodell analysiert, das auf reprasentativen Daten der Gewerbe- und Einkommensteuerstatistiken basiert. Es zeigt sich, dass eine einheitliche kommunale Unternehmensteuer die Streuung des Gewerbesteueraufkommens uber die Gemeinden und Regionen deutlich verringern wurde.

Taxe professionnelle, imposition des entreprises et coût d'usage du capital

Cet article contribue au débat sur la réforme de la taxe professionnelle en soulignant un argument en faveur de son remplacement par une contribution assise sur la valeur ajoutée qui a été apparemment négligé dans les discussions récentes. Il s’appuie à cette fin sur le concept de coût d’usage des facteurs de production et, en particulier, sur le coût d’usage du capital. En tenant compte des autres impôts qui pèsent sur les entreprises, nous montrons que le changement d’assiette envisagé s’accompagne d’une baisse très sensible du coût d’usage du capital, et une hausse limitée du coût d’usage du travail et de la terre.

The downside of formula apportionment: evidence on factor demand distortions

This paper investigates the impact of corporate taxes on the input factor choice of multi-jurisdictional entities (MJEs) under a formula apportionment (FA) regime. Our testing ground is the German local business tax that applies FA regulations with income apportionment according to the relative payroll share. Using unique data on the population of German firms, we find that MJEs distort their employment and payroll costs in favor of low-tax locations. On average, a 1-percentage-point-increase in the tax rate differential between an affiliate and foreign group members is found to lower the affiliate’s payroll to capital ratio by 1.9%.

STRATEGIC CONSOLIDATION UNDER FORMULA APPORTIONMENT

This paper argues that profit-shifting activities of multi-jurisdictional enterprises (MJE) are maintained under a tax system of consolidation and formula apportionment (FA). A theoretical model discusses how an MJE can exploit its impact on the definition of the consolidated group strategically. The analysis shows that the MJE will run individual affiliates as separate un-consolidated firms for tax purposes if intra-group tax-rate differences, and thereby potential gains from profit-shifting, are large. We test this prediction using confidential firm-level tax-return data for the local business tax in Germany. The identification strategy exploits a quasi experiment derived from a major company tax reform in 2001 that reduced the costs associated with separating out individual affiliates. Our results show that, evaluated at the sample mean, an increase in the tax-rate variance among the MJE’s affiliates by one standard deviation reduces the number of consolidated affiliates by 20%.

Das Konzept des ‚Regionalen Gewerbeflächenpools’ aus ökonomischer Sicht

The paper at hand represents the first contribution dealing with the innovative concept of the ‚Regional Industrial Area Pool’ from an economic perspective. Coming from political practice on the local and regional level, respectively, the pool approach analyzed here goes — both spatially and conceptually — far beyond the traditional concept of ‚inter-municipal industrial areas’. In the regional industrial area pool concept municipalities which are spatially close to each other are cooperating in the field of industrial area policy. The respective member municipalities participate in the pool by industrial area or monetary contributions. The individual pool members, then, benefit according to their pool share from the pool’s distributed industrial area sale revenues and local business tax yield. Thus, there is a spread of risks in the respective municipal revenues between the pool members. Furthermore, inter-municipal pooling leads to an enhanced ‚regional’ competitiveness which is a particularly important aspect in times of an increased ‚competition of regions’. The paper deals with selected economic questions regarding the pool concept, especially from a municipal-economic perspective.

Gestaltungsmöglichkeiten der Stadtstaaten bei gegebener Steuersatzautonomie für die Körperschaftsteuer

Summary German corporate companies are taxed with a federal corporation tax and with a local business tax. The latter has a similar, but broader tax base (including e. g. 25 % of interest payments) and its tax rate is set independently by every municipality including the so called city-states (Stadtstaaten). The federal corporation tax revenue is equally split between the federal government and the federal states (Länder). Till now the federal tax rate has been fixed by the German government. Federal states have not had the right to rule the tax rate of their share of corporation tax. At present a federal commission is discussing whether this should be possible in the future. Once granted this privilege, the city-states will be able to substitute their part of corporation tax by a higher local business tax. Furthermore, because of its broader tax base, there will be a reduction of the statutory tax rate for corporations without a decrease in tax revenue. This paper analyses the revenue effects of this substitution for the city-states taking into account the German fiscal equalization system and the incentive of profit shifting to the city-states. The analysis shows some positive revenue effects to the city-states, if they will substitute their part of corporation tax by a higher local business tax. The revenue effects are subject to different scenarios and add up to 17.5 million for Hamburg, 10.4 million for Berlin and 3.6 million for Bremen.

Tax Autonomy for Corporation Tax and Strategic Behavior of the City-States: An Empirical Analysis

German corporated companies are taxed with a federal corporation tax and with a local business tax. The latter has a similar, but broader tax base (including e.g. 25% of interest payments) and its tax rate is set independently by every municipality including the so called city-states (Stadtstaaten). The federal corporation tax revenue is equally split between the federal government and the federal states (Lander). Till now the federal tax rate has been fixed by the German government. Federal states have not had the right to rule the tax rate of their share of corporation tax. At present a federal commission is discussing whether this should be possible in the future. Once granted this privilege, the city-states will be able to substitute their part of corporation tax by a higher local business tax. Furthermore, because of its broader tax base, there will be a reduction of the statutory tax rate for corporations without a decrease in tax revenue. This paper analyses the revenue effects of this substitution for the city-states taking into account the German fiscal equalization system and the incentive of profit shifting to the city-states. The analysis shows some positive revenue effects to the city-states, if they will substitute their part of corporation tax by a higher local business tax. The revenue effects are subject to different scenarios and add up to 17.5 million for Hamburg, 10.4 million for Berlin and 3.6 million for Bremen.

Should Liberal Professionals and Farmers Be Liable to the German Local Business Tax? Theoretical Considerations and Empirical Analysis

Taxing local business is a common feature of local public finance in many countries. The German local business tax (Gewerbesteuer) is the main tax revenue source of municipalities in Germany. Liberal professionals, however, have traditionally been exempted from it. In the past, the German Federal Constitutional Court justified this exemption by arguing that their production differed systematically, i.e. in their intensity of capital and labour employment. This paper shows that this claim does not hold true empirically. Furthermore, we analyse the fiscal and distributional effects of a hypothetical inclusion of the liberal professionals in the local business tax. We use a microsimulation model based on official local business tax and personal income tax files. The results indicate that the total revenue effect would be low, because the local business tax can be credited against the personal income tax. On the other hand, today's undesirably unequal distribution of local business tax revenues between municipalities would decrease. We conclude that if a local business tax is levied, all types of enterprise should be liable.

Reforming the German Local Business Tax – Lessons from an International Comparison and a Microsimulation Analysis

Reforming the German Local Business Tax – Lessons from an International Comparison and a Microsimulation Analysis, 10.1628/001522108X337620, Jahrgang 64 (2008) / Heft 2, 0015-2218 (1614-0974), Public Finance Analysis

Local Concession Dues and Their Effects to the Payments in the German Fiscal Equalization System

Local authorities charge supply companies with concession dues on gas, water and electricity (Konzessionsabgaben), which are similar to some local taxes (local business tax, real property tax). These taxes have already been included in the fiscal equalization system and in the future concession dues should be treated alike. Its importance in revenue terms is an additional reason for this: concession dues amount to 1.8 bl. - compared to real property tax of typ A of 0.3 bl. If concession dues are treated as mentioned above, payments in the fiscal equalization system may be strategically manipulated. First concession dues and their effects of the payments in the fiscal equalization system will be described. Then I will have a look at the aforementioned strategic policy and its effects on the payments and the arrangements to contain this strategic policy, which is exemplified by the so called city-states (Stadtstaaten).

Strategic Consolidation Under Formula Apportionment

This paper argues that profit-shifting activities of multi-jurisdictional enterprises (MJE) are maintained under a tax system of consolidation and formula apportionment (FA). A theoretical model discusses how an MJE can exploit its impact on the definition of the consolidated group strategically. The analysis shows that the MJE will run individual affiliates as separate un-consolidated firms for tax purposes if intra-group tax-rate differences, and thereby potential gains from profit-shifting, are large. We test this prediction using confidential firm-level tax-return data for the local business tax in Germany. The identification strategy exploits a quasi experiment derived from a major company tax reform in 2001 that reduced the costs associated with separating out individual affiliates. Our results show that, evaluated at the sample mean, an increase in the tax-rate variance among the MJE's affiliates by one standard deviation reduces the number of consolidated affiliates by 20%.

Subnational Taxes in Developing Countries: The Way Forward

This paper reviews the literature and evidence on the most appropriate structure of regional and local taxes in developing countries. A good subnational tax system is critical to an effective and sustainable system of intergovernmental fiscal relations - a need that has become increasingly important around the world as more and more public services are being delivered through subnational governments. In most developing countries potentially sound and productive taxes exist that are suitable for regional and local governments: property taxes, taxes on motor vehicles, surcharges on national personal income taxes, payroll taxes, and even, in some cases, regional value added taxes and properly designed local business taxes.

Market access effect and local tax setting: evidence from French panel data

The main purpose of this article is to assess the existence of an agglomeration rent in the French local tax setting. In order to perform that test, we first describe a simple economic geography model in which the main agglomeration force at work is the market access effect . We then estimate a derived tax-setting equation using spatial panel data for the period 1993 2003. We confirm a positive and significant relationship between the tax rate and market access, which suggests there is a taxable agglomeration rent in the French municipalities. We also observe significant mimic behaviour between French localities when they choose their rate of local business tax and vertical interactions between municipalities and regions.

Can the Abolishment of the Austrian Local Business Tax Serve as a Model for Reforming the German Municipal Taxes? (Die Abschaffung Der Österreichischen Gewerbesteuer Als Vorbild Für Eine Reform Der Kommunalen Steuern in Deutschland?)

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.

Testimony of Peter D. Enrich on Cuno and Competitiveness: Where to Draw the Line Before the Subcommittee on International Trade of the Committee on Finance United States Senate

In response to legal challenges to the constitutionality of many state tax incentives designed to influence business location decisions, federal legislation has been proposed that is designed to shelter a wide range of such incentives from Commerce Clause scrutiny. In this testimony, offered before the Senate Finance Committee's Subcommittee on International Trade, I present two reasons why Congress should approach the proposed legislation with great caution: First, the accelerating proliferation of state and local business tax incentives that are conditioned on business location and that discriminate in favor of in-state activity is contrary to the national interest and should not be encouraged by federal legislation. Second, the approach taken by the proposed legislation - which seeks to authorize certain location-based incentives, such as investment tax credits, while not authorizing other similar incentives of kinds previously invalidated by the courts - is doomed to failure, because the line it attempts to draw is arbitrary and insubstantial.

A Local Income and Corporation Tax as an Alternative to the German Local Business Tax

Summary The paper empirically analyses the impact on individual municipalities of replacing the German local business tax by a local surcharge on income and corporation tax. The microsimulation models used for this and refined for the present paper originate in calculations carried out for the Federal Ministry of Finance in cooperation between the Federal Statistical Office and the Humboldt University in Berlin. The data basis is formed by the roughly 30 million individual data sets of the most up-to-date income and local business tax statistics provided by the Federal Statistical Office. A local surcharge tax which, like the BDI/VCI model analysed, assigns tax revenue incurred on profits to the municipality of permanent establishment and that on other income to the domicile municipality, affects the revenue situation of the municipalities in highly differing ways. The losers in such a local tax reform include those municipalities in which an above-average number of industrial and commercial enterprises are resident. These are the “core towns” of the Old Federal Laender in particular. By contrast, the revenue situation of the surrounding municipalities and of the municipalities with a rural character would considerably improve on average. However, the core towns in the New Federal Laender which are currently tax-weak because they have little industry would also improve their revenue situation in most cases by applying a surcharge tax. In order to maintain the financial status quo, the core towns in the Old Federal Laender in particular would have to levy relatively high local tax rates, whilst the surrounding municipalities would be able to become more attractive by applying tax rates which as a rule would be much lower. The consequence of this would be that highincome earners in the core towns would have a not inconsiderable incentive to change their place of residence for tax purposes, which would further worsen the financial situation of the core towns.

La concurrence fiscale entre communes est-elle plus intense en milieu urbain qu’en milieu rural ?

Is tax competition more intense in urban than in rural areas ? The aim of this paper is to test the hypothesis that tax competition intensity is stronger in urban area than in rural area. We use the theoretical foundations of tax competition literature where horizontal strategic interactions are due to tax base mobility between local jurisdictions belonging to the same level of government. When tax base is mobile, an action chosen by a jurisdiction affects the budget constraint of another jurisdiction, leading to strategic interactions in local fiscal choices. As a consequence, tax rates in one jurisdiction depend on tax rates in the neighbouring jurisdictions. We then build a spatial model of local tax choices which takes into account the fiscal decisions made by concurrent jurisdictions as well as the local socio-economic characteristics such as tax base and population density in the explanatory variables. More precisely, we test the existence of horizontal fiscal interactions inside some different groups of jurisdictions by estimating the slope of each reaction function. We measure the sign and the intensity of the spatial lag parameter using spatial econometrics. We then rely these estimates to the features of each group of jurisdictions and more particularly to its classification in urban areas and in rural areas. We observe that jurisdictions belonging to urban areas tend to mimic each other whereas those who belong to rural areas does not take into account the neighbouring tax choices when they set their local business tax. Rural jurisdictions set their local business tax only by looking at their own socio-economic features.

Le rôle des interactions dans les choix fiscaux des agglomérations françaises

The Role of Interactions in the Tax Choices of the French Cities The aim of this article is to explain the French agglomerations tax choices and more particularly the role of horizontal and vertical tax interactions in the choice of their local business tax. Initially, we build a model of local tax choice which takes into account both externalities. Then we estimate this model using the spatial econometrics techniques for the year 2004. We test the assumption that the rate of local business tax chosen by an agglomeration depends on those of the concurrent agglomerations, the departmental rate and the regional rate. We observe significant tax interactions between the French agglomerations. In addition, the local and departmental tax rates appear to be strategic complements. On the other hand, the regional rates do not seem to influence significandy the French agglomerations tax choices.

Reform der Gewerbesteuer: Wie es Euch gefallt?- Eine Nachlese

: One of the most pertinent reform discussions in Germany is found in the debate on the local business tax. During the last year, two basic reform proposals, a revitalisation of the current local business tax and its replacement by a surcharge on personal and corporate income taxes, intensively competed. Finally, none of these alternatives was realised. The federal parliament and government could only agree to introduce temporary financial relief for local jurisdictions. In this article, the continuous need for a fundamental reform of local government finances is emphasised. After a discussion of the basic alternative reform models against the background of characteristics of economically reasonable local government finances, the simulated impact of a local surcharge on income taxes is compared to the tax rate differences at the local level in Switzerland. The surcharge model would lead to smaller tax rate differentials than currently exist at the Swiss local level. The resistance against such a reform is explained by the fact that political actors at the local level oppose the implied higher political responsibility when citizens face local income tax rates as prices for local public services.

Zu Reformoptionen der Gemeindefinanzen

Abstract In their paper Thomas Döring and Bernd Hansjürgens refer to the reform discussion of local public finance in Germany. Against the background of rising expenditures and lower revenues a fiscal reform on the local level is absolutely necessary. Such a reform should focus on both the expenditure and the revenue side of the local budget. With respect to expenditures a new division of functions between the upper governmental levels and the local level should be taken into account. With respect to revenues reforms are needed that facilitate communities’ ability to raise revenues from own sources. It becomes apparent that the current political discussion which focuses on the centralisation of the costs of unemployment and on the reform of the local business tax is much too narrow to solve the fiscal crisis on the local level. Johanna Hey argues that the upcoming reform of the municipal finance system gives the chance to overcome the sufficiently well-known problems of the German local trade tax. Although the starting point of the discussion is the deficit of the municipal budgets the author calls for a conceptual framework. The sole goal of raising additional revenue will not lead to a rational tax system. As other taxes local taxes have to be designed in accordance to the ability-to-pay-principle, since it is impossible to define a tax base equivalent to the cost of public goods. The author compares the three recently discussed models. From a systematic and constitutional point of view the abolishment of the trade tax and implementation of a local surcharge to the personal and corporate income tax is the most favourable option for reform. Juergen B. Donges recommends a complete overhaul of local taxation systems according to the principles of pay-as-you-go and of allocative neutrality. Ideally, local public revenues should be mainly based on charges levied directly on users of local public services. But the nature of some public services make taxes a better source of revenues for municipalities. The author suggests three kinds of taxes: First, the already existing real property tax (Grundsteuer) based on an assessment closer to market values. Second, a new local corporation tax (“allgemeine Betriebssteuer”) will be introduced; it would replace the existing trade tax on income (Gewerbesteuer) which is fundamentally deficient. Third, a new local personal income tax (“allgemeine Bürgersteuer”) will be imposed, intended to replace federal income tax transfers for local authorities and local shares of value added tax. In any case, a reform of local taxation should not lead to higher overall taxation. Each local government should freely choose its own levels of taxation, meaning efficiency gains from competition of public services at a local level.