On the political and fiscal determinants of income redistribution under federalism and democracy: evidence from Germany
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Several recent studies suggest that transfers from central to regional governments are motivated by political considerations. In this paper we examine if this is also the case for transfers from regional to central governments in the context of the German fiscal equalization system. We examine the factors that contribute to differences in tax revenues across German states. The evidence indicates that both fiscal incentives and political factors can explain these differences, although in Germany the former are more important. Moreover, accounting for fiscal institutions has important consequences for the empirical assessment of political influences on taxation. Overall we find that the political affiliation of the state governor is an important factor in explaining differences in state tax revenues. Thus, the right-wing party (CDU/CSU) is effective in relaxing the tax burden at the state level. In contrast, partisan alignment between the state government and the federal government loses its importance once fiscal conditions enter the empirical model.
KeywordsIntergovernmental transfers Redistributive politics Political alignment
JEL ClassificationD72 H71 H77
We would like to thank Galina Zudenkova, Matthias Dahm, Christian Martin and two anonymous referees and the editor for their comments and suggestions. Carsten Schröder provided us with data on marginal tax rates. Thomas Bräuninger provided us with data on policy positions. We thank both for their support of this work. Bernd Theilen gratefully acknowledges financial support from the Spanish Ministerio de Ciencia e Innovación under project ECO2010-17113.
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