Fiscal equalization and the tax structure

Publication date: Available online 26 January 2020Source: Regional Science and Urban EconomicsAuthor(s): Fédéric Holm-HadullaAbstractThis paper studies the impact of redistributive fiscal equalization transfers on the choice between a distortionary capital tax and a non-distortionary land tax at the local layer of government. In a standard tax competition model, the paper shows that this impact is ambiguous in that: depending on the motives driving local policy choices, fiscal equalization may either induce a more or a less distortionary tax structure. Using a natural experiment from German municipal finance, the paper provides empirical evidence in support of the latter prediction, i.e. fiscal equalization tilts the tax structure towards less distortionary tax instruments.
Source: Regional Science and Urban Economics - Category: Science Source Type: research