Local Business Tax Research Articles

Tax Mimicking in Local Business Taxation: Quasi-Experimental Evidence from Portugal

I exploit an exogenous reform introducing a local business tax in Portugal to study tax mimicking among jurisdictions. The identification strategy relies on a quasi-experimental difference-in-differences methodology and heterogeneity in treatment intensity. Results show evidence of significant short-run tax mimicking that decreases over time. I study possible generating processes underlying the strategic interaction among municipalities and find significant evidence of electoral concerns. These electoral concerns are not met with electoral consequences at the local elections, which may be behind the diffusion of local business taxation in the long run.

Ancora sulle questioni dell'IRAP

This paper offer a more in depth investigation on the issue of the nature and incidence of IRAP (the local business tax applied in Italy), namely on the effects that this tax produces on certain macroeconomic variables – such as consumption, investment and exports – in the regions where the rates applied are higher. In particular, it shows the results of a territorial and sectorial empirical analysis of the trend in investments accounted on the balance sheet by firms during the period 2006-2014. The analysis of the data of tangible assets, amortization and some balance sheet indicators of financial structure, profitability and tax incidence, suitably disaggregated by region and by sector, provides useful evidence in favor of the hypothesis of the forward shifting of this tax and its adverse impact on business investment in so-called “Scoundrel Regions” as well as in all regions which have deliberated pejorative changes in the ordinary tax rate.

Local taxes and political influence: evidence from locally dominant firms in German municipalities

We analyze the impact of locally dominant firms—i.e. firms that contribute a sizeable share to municipalities’ revenues—on local business tax rates. We argue that these firms have considerable political power locally even if they are not large in the regional or national perspective. These locally dominant firms can use their political power to voice their concerns directly vis-a-vis the local government—a channel of influence that is hardly available in municipalities with an atomistic structure of tax payers. We hypothesize that municipalities with locally dominant firms will set lower tax rates than municipalities in which tax-payers’ concentration is low. We test the impact of tax-payers’ concentration on local business tax rates using data from 423 municipalities in the German state Hesse between 1998 and 2005. The estimation technique accounts for spatial lags and autoregressive disturbances. Results support our central hypothesis: the higher the tax-payers’ concentration, the lower the municipal business tax rates.

Large and Influential: Firm Size and Governments’ Corporate Tax Rate Choice?

Theory suggests that large firms are more likely to engage in lobbying behaviour and have better bargaining positions against their host governments than smaller entities. Conditional on jurisdiction size, public policy choices are thus predicted to depend on the shape of a jurisdiction's firm size distribution, with more business-friendly policies being enacted if economic activity is concentrated in a small number of entities. We empirically assess this prediction studying local business tax choices of German municipalities. Exploiting rich and quasi-experimental variation in localities' firm size structures, we find evidence for an inverse relationship between the concentration of economic activity and communities' business tax choices. The effect is statistically significant and quantitatively relevant, suggesting that the rising importance of large businesses may trigger shifts towards a more business-friendly design of (tax) policies.

How to stop the race to the bottom

Standard tax multipliers are a widespread feature of fiscal equalization systems. A simple theoretical model shows that actual tax multipliers respond positively to changes in standard tax multipliers. This theoretical prediction is tested empirically using data on municipalities in Germany. A quasi-experiment in the state of North Rhine-Westphalia is exploited to identify the incentive effect. The empirical results confirm that local business tax policy is shaped by standard tax multipliers. They provide a straightforward practical tool to avoid a race to the bottom in local business tax rates.

Yardstick competition and partial coordination: Exploring the empirical distribution of local business tax rates

This paper explores a striking form of tax policy interdependence that can be observed in the German federation. Though municipalities enjoy discretion in setting the local business tax rate, large fractions of municipalities – in some states even the majority – set identical tax rates. Our analysis shows that this tax-rate “bunching” is not the result of federal or state-level institutions. Possible explanations rest on partial coordination and yardstick competition. The role of the former is exemplified by the finding that small jurisdictions and jurisdictions sharing the same county are more likely to engage in “bunching”. Yardstick competition seems also relevant since jurisdictions for which strategic tax-setting should be associated with larger gains and lower cost are in fact more likely to set identical tax rates.

Kommunale Realsteuerpolitik auf dem Prüfstand – eine empirische Auswertung am Beispiel Rheinland-Pfalz

Abstract In Germany, state and local authorities are repeatedly in conflict with each other regarding the funding of municipal households. Concerning this matter a sufficient fiscal endowment of local public authorities does not only depend on a deemed-to-satisfy provision of state grants but also requires an adequate exhaustion of existing sources of revenues at the local government level. Against this background, the paper analyses local tax policy in order to assess whether the involved potential of budget finance is exploited sufficiently. Taking Rhineland-Palatinate as a case study the degree of tax exploitation (local business tax, local property tax) is empirically estimated for the time period 2007 – 2013.

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

This 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.

REDUCING THE CYCLICAL VARIABILITY OF LOCAL TAXES IN JAPAN USING A THREE-FACTOR TAX BASE

ABSTRACT Local business tax reform in Japan from 2004 through 2015 provides opportunity to evaluate the effects on cyclical variability of local taxes through movement from a single factor income-based tax to a three-factor base consisting of profits, capital and value added. The tax rates applied individually to each of the three factors have been reweighted periodically beginning in 2004 and most recently in 2015. Empirical tests using data from the Japanese Ministry of Finance indicate that as a result of the reweighting of the three-factors the short-run elasticity of local business tax revenues may be approaching that of a pure value added tax base. Models of hypothetical tax revenues under the periodically reweighted three-factor tax bases show the burden of the local business tax being shifted away from capital toward labor, raising the concern that possible adverse factor substitution may result. Keywords Variability of tax revenues, elasticity of tax revenues, value added tax, local tax receipts, enterprise tax

SPATIAL ADMINISTRATIVE STRUCTURE AND INTRA‐METROPOLITAN TAX COMPETITION

ABSTRACTI investigate whether the spatial administrative structure of agglomerations is associated with local business tax rates in core cities of agglomerations. Using data for German municipalities, I define agglomerations based on distances and based on cumulative population densities. The results show that the population share of the core in its agglomeration is positively associated and the number of surrounding municipalities is negatively associated with the tax rate of the core. When municipalities consolidate, the core has the opportunity to increase the tax rate.

Tax Exporting and the Business Share of Sales Tax Levies

In 2010, state and local sales taxes on non‐labor input purchases made by businesses constituted 42 percent of state and local sales tax revenue, on average. Taxing firms could enable state and local governments to export portions of their tax burdens. The average tax rates that subnational governments choose to levy on business purchases are potentially influenced by the exportability of those taxes as well as on the exportability of alternative taxes. If a state's capacity to export the burdens of alternative taxes is limited, then governments may rely more heavily on business sales taxes. This study examines the relationship between tax exporting and the average sales tax rate that state and local governments choose to levy on business purchases using state‐level panel data from 2003 to 2010. I find that the average sales tax rate is largely determined by a state's ability to export taxes to national taxpayers through the deductibility provisions provided by the federal tax code. The offset provided to firms by the deductibility of state and local business taxes is positively related to the average sales tax rate on business purchases. The deductibility offset available to households that itemize places downward pressure on average sales tax rates. The results suggest that federal tax policies that increase the deductibility offset for firms or reduce the offset for itemizers could prompt subnational governments to increase sales tax levies on business purchases which would increase business tax deductions at the federal level and offset revenue gains from federal tax reform.

Business taxes and the electoral cycle

The purpose of this paper is to assess whether the timing of elections affects tax policy choices. To do so, we exploit information on the German local business tax which is set autonomously by German municipalities. As the dates for local council elections vary across German states, the data allows us to disentangle effects related to the timing of elections from common trends. The findings support the notion of a political cycle in tax setting as the growth in local business tax rates is significantly reduced in the election year and the year prior to the election, while it significantly increases in the year after the election. This pattern turns out to be robust against a number of sensitivity checks.

Redistribution territoriale des perspectives de croissance des budgets locaux après la réforme de la fiscalité locale des entreprises

La réforme de la fiscalité locale des entreprises redistribue à grande échelle les perspectives de croissance des ressources et des budgets des collectivités territoriales. Le remplacement de l’investissement par la valeur ajoutée dans l’assiette fiscale des entreprises et la réaffectation des taxes sur les ménages déplacent le potentiel fiscal des territoires industriels vers les territoires de services et les territoires résidentiels. La réforme opère également une redistribution, inter et intra-catégorielle, du pouvoir fiscal. L’autonomie fiscale disparaît pour les régions, recule pour les départements et demeure stable pour le bloc communal mais avec une redistribution interne de grande ampleur.

Does Fiscal Cooperation Increase Local Tax Rates in Urban Areas?

Charlot S., Paty S. and Piguet V. Does fiscal cooperation increase local tax rates in urban areas?, Regional Studies. The main purpose of this paper is to assess the effects of fiscal cooperation on local taxation in a decentralized country using experience in French urban municipalities. A tax-setting model for local business tax is estimated, using spatial and panel econometric techniques, for the period 1993–2003. Controlling for population size, it is found that fiscal cooperation is likely to reduce tax competition and, as a consequence, to increase local business tax rates.

The Tax-Rate Elasticity of Local Business Profits

Local business profits respond to local business tax (LBT) rates that vary across municipalities. We estimate that a one percent increase in the LBT rate decreases the LBT base by 0.45 percent, based on the universe of German LBT return files, which include corporations and unincorporated businesses. However, the fiscal equalization scheme largely compensates municipalities for the loss in the LBT base when they increase the LBT rate. Our estimates suggest that using taxrevenue data instead of tax return data, as commonly done in the literature, results in a significant bias of the elasticity away from zero.

Do governments tax agglomeration rents?

Empirical evidence suggests that firms receive rents from locating in economic agglomerations and industry clusters. Using the German local business tax as a testing ground, we empirically investigate whether these agglomeration rents are taxable for local governments. The analysis exploits a rich data source on the population of German plants to construct measures for the communities’ agglomeration characteristics. The findings indicate that economic agglomerations and industry clusters exert a positive impact on the jurisdictional tax rate choice. Further analysis moreover suggests that a municipality’s potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.

Does Fiscal Coopération Increase Local Tax Rates in Urban Areas?

The main purpose of this paper is to assess the effects of fiscal cooperation on local taxation in a decentralized country, using the French experience in urban municipalities. We estimate a model of tax setting for local business tax using spatial and dynamic econometric techniques, for the period 1993-2003 and an unbalanced data set. As predicted by the theory, we find that reducing the number of municipalities is likely to limit tax competition and, as a consequence, increase local business tax rates.

Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of employment location to local taxes

This paper examines the effect of agglomeration economies on the sensitivity of employment location to tax differentials. In the presence of agglomeration economies, when a firm moves into a community attracted by a tax reduction, other firms may decide to follow, implying that agglomeration economies increase tax effects. However, this result only holds when jurisdictions are relatively similar. If economic activities are concentrated in a single jurisdiction from the outset, agglomeration economies might offset tax differentials and so limit the role played by taxes. We analyze the effect of a local business tax on the location of employment in the Spanish region of Catalonia. We relate differences in the sensitivity of employment location to local taxes to differences in the Ellison and Glaeser (1997) index, an industry measure of geographical concentration. We test if agglomeration economies: (1) strengthen tax effects in dispersed local labor markets in which municipalities are relatively similar; and (2) weaken tax effects in (concentrated) local labor markets showing a marked core–periphery pattern. We find that agglomeration economies strengthen tax effects in dispersed local labor markets but neither weakens nor strengthens tax effects in concentrated local labor markets.

The French Local Business Tax Reform: Myth and Reality

With effect from 1 January 2010, the French government has reputedly “abolished” the controversial tax on notional income of a business, i.e. the local business tax. With EUR 34 billion in annual proceeds, this tax represented around 43.9% of local government resources, and resulted in more revenue than corporate income tax. A thorough understanding of the reform is, thus, essential for any potential investor.

Do Agglomeration Forces Strengthen Tax Interactions?

The main purpose of this paper is to assess the existence of tax interdependencies among French local tax setting by taking into account the agglomeration forces. A model of tax setting for the local business tax is estimated using spatial econometrics techniques for 2002. First, it is shown that the mimicking behaviour between jurisdictions is not more intense in denser areas—in population or economic activity terms—suggesting that tax competition is not stronger as agglomeration increases. Secondly, a positive relationship is observed between tax rate and capital stock only for urban jurisdictions, suggesting a ‘taxable agglomeration rent’, as highlighted by new economic geography models.