Tax and the city - a theory of local tax competition and evidence from Germany

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URL:	http://janeba.vwl.uni-mannheim.de/fileadmin/user_u...
Document Type:	Working paper
Year of publication:	2011
Place of publication:	Mannheim
Edition:	Version May 2011
Publication language:	English
Institution:	School of Law and Economics > VWL, insbes. Finanzwissenschaft u. Wirtschaftspolitik (Janeba)
Subject:	330 Economics
Abstract:	Despite the well-developed empirical literature on local tax competition, little is known about the actual spatial structure of inter-municipal competition. Assuming that competition takes place only among neighbours (as in the empirical literature) is at odds with the theoretical approaches where all jurisdictions compete simultaneously. In this paper we use a survey conducted among mayors in the German state of Baden-Württemberg to show that the perceived intensity of competition varies considerably between jurisdictions, and can mainly be explained by the size and location of the jurisdiction. Based on these findings we develop a sequential tax competition model in which city centres compete with other city centres and their own surrounding jurisdictions. This model predicts that larger jurisdictions do not necessarily rely more on capital taxes when they face strong competition with more distant competitors. In addition, we discuss how the model compares to a standard simultaneous approach and show that results from our sequential model are in line with trends in local taxation in Baden-Württemberg. Classification: H71, H73, H77 Keywords: local tax competition, survey, intensity of competition