Advertisement

International Tax and Public Finance

, Volume 24, Issue 2, pp 313–337 | Cite as

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

  • Ivo BischoffEmail author
  • Stefan Krabel
Article

Abstract

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-à-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.

Keywords

Tax competition Lobbying Local business taxation Germany Spatial econometrics 

JEL Classification

H71 C23 D72 

Notes

Acknowledgments

We thank Thushyanthan Baskaran Frédéric Blaeschke, Guido Bünstorf, Friedrich Heinemann, Steffen Osterloh, Reinhold Kosfeld and the participants of the Annual meeting of the EPCS 2014 in Cambridge, UK and two anonymous referees for helpful comments.

References

  1. Allers, M. A. (2012). Yardstick competition, fiscal disparities, and equalization. Economics Letters, 117, 4–6.CrossRefGoogle Scholar
  2. Anderson, J. E., & Wassmer, R. W. (1995). The decision to ‘bid for business’: Municipal behavior in granting property tax abatements. Regional Science and Urban Economics, 25, 739–757.CrossRefGoogle Scholar
  3. Anselin, L. (1988). Spatial econometrics: Methods and models (studies in operational regional science). Dordrecht: Kluwer.CrossRefGoogle Scholar
  4. Baldwin, R. E., & Krugman, P. (2004). Agglomeration, integration and tax harmonisation. European Economic Review, 48(1), 1–23.CrossRefGoogle Scholar
  5. Baldwin, R. E., & Okubo, T. (2014). Tax competition with heterogeneous firms. Spatial Economic Analysis, 9(3), 309–326.CrossRefGoogle Scholar
  6. Baskaran, T. (2012). The flypaper effect: evidence from a natural experiment in Hesse. MPRA Paper No. 37144 (version March, 2012).Google Scholar
  7. Becker, G. S. (1983). A theory of competition among pressure groups for political influence. Journal of Economics, XCVLL, 371–400.Google Scholar
  8. Becker, S., Egger, P., & Merlo, V. (2012). How low business tax rates attract MNE activity: Municipality-level evidence from Germany. Journal of Public Economics, 96, 698–711.CrossRefGoogle Scholar
  9. Besley, T. J., & Case, A. C. (1995). Incumbent behavior: Vote seeking, tax setting and yardstick competition. American Economic Review, 85(1), 25–45.Google Scholar
  10. Bischoff, I., Boenisch, P., Haug, P., & Illy, A. (2013). Vertical grants and local public efficiency.IHW-Discussion Paper No 1/2013.Google Scholar
  11. Borck, R., & Pflüger, M. (2006). Agglomeration and tax competition. European Economic Review, 50(3), 647–688.CrossRefGoogle Scholar
  12. Brueckner, J. K. (2003). Strategic Interaction among governments: An overview of empirical studies. International Regional Science Review, 26(2), 175–188.CrossRefGoogle Scholar
  13. Brueckner, J. K., & Saavedra, L. A. (2001). Do local governments engage in strategic property—Tax competition? National Tax Journal, LIV(2), 203–229.CrossRefGoogle Scholar
  14. Buettner, T. (2001). Local business taxation and competition for capital: The choice of the tax rate. Regional Science and Urban Economics, 21, 215–245.CrossRefGoogle Scholar
  15. Buettner, T. (2003). Tax base effects and fiscal externalities of local capital taxation: Evidence from a panel of German jurisdictions. Journal of Urban Economics, 54, 110–128.CrossRefGoogle Scholar
  16. Buettner, T. (2006). The incentive effect of fiscal equalization transfers on tax policy. Journal of Public Economics, 90, 477–497.CrossRefGoogle Scholar
  17. Chirinko, R. S., & Wilson, D. J. (2010). Can lower tax rates be bought? Business rent-seeking and tax competition among U.S. states. National Tax Journal, 63(4), 967–994.CrossRefGoogle Scholar
  18. Dembour, C. (2008). Competition for business location: A survey. Journal of Industry, Competition and Trade, 8, 89–111.CrossRefGoogle Scholar
  19. Drope, J. M., & Hansen, W. L. (2006). Does firm size matter? Analyzing business lobbying in the United States. Business and Politics, 8(2), 1–17.CrossRefGoogle Scholar
  20. Drukker, D. M., Prucha, I. R., & Raciborski, R. (2011). Maximum-likelihood and generalized spatial two-stage least-squares estimators for a spatial-autoregressive model with spatialautoregressive disturbances. Technical report, , http://econweb.umd.edu/~prucha/Papers/WP_spreg_2011.pdf.
  21. Egger, P., Koethenbuerger, M., & Smart, M. (2010). Do fiscal transfers alleviate business tax competition? Evidence from Germany. Journal of Public Economics, 94, 235–246.CrossRefGoogle Scholar
  22. Feld, L. P. (1997). Exit, voice and income taxes: The loyalty of voters. European Journal of Political Economy, 13, 255–478.CrossRefGoogle Scholar
  23. Foremny, D., & Riedel, N. (2012). Business taxes and the electoral cycle. CESifo Working Paper Series No. 3729.Google Scholar
  24. Fossen, F. M., & Steiner, V. (2014). The tax-rate elasticity of local business profits.Discussion Paper—School of Business and Economics—Freie Universität Berlin, No. 2014/28.Google Scholar
  25. Genschel, P., & Schwarz, P. (2011). Tax competition: A literature review. Socio-Economic Review, 9, 339–370.CrossRefGoogle Scholar
  26. Geys, B., & Osterloh, S. (2013). Borders as boundaries to fiscal policy interactions? An empirical analysis of politicians’ opinions on rivals in the competition for firms. Journal of Regional Science, 53(4), 583–606.Google Scholar
  27. Grossman, G. M., & Helpman, E. (2001). Special interest politics (2nd ed.). Cambridge and London: MIT Press.Google Scholar
  28. Haufler, A. (1997). Factor taxation, income distribution and capital market integration. Scandinavian Journal of Economics 99(3), 425–446.Google Scholar
  29. Haufler, A., & Wooton, I. (1999). Country size and tax competition for foreign direct investment. Journal of Public Economics, 71, 121–139.CrossRefGoogle Scholar
  30. Heinemann, F., & Janeba, E. (2010). Viewing tax policy through party-colored glasses: What German politicians believe. German Economic Review, 12(3), 286–311.CrossRefGoogle Scholar
  31. Hendrick, R., Wu, Y., & Jacob, B. (2007). Tax competition among municipal governments: Exit versus voice. Urban Affairs Review, 43, 221–255.CrossRefGoogle Scholar
  32. Holmes, T. J. (1999). How industries migrate when agglomeration economies are important. Journal of Urban Economics, 45(2), 240–263.CrossRefGoogle Scholar
  33. Inman, R. P. (1989). The local decision tax: Evidence from large U.S. cities. Regional Science and Urban Economics, 19, 455–491.CrossRefGoogle Scholar
  34. Janeba, E., Osterloh, S. (2012). Tax and the city—A theory of local tax competition and evidence for Germany. ZEW —Centre for European Economic Research Discussion Paper No. 12-005.Google Scholar
  35. Kächelein, H. (2014). Asymmetric capital tax competition and choice of tax rate: Commuting as an explanation for tax differentials. International Tax and Public Finance, 21, 50–65.CrossRefGoogle Scholar
  36. Kelejian, H. H., & Prucha, I. R. (1998). A generalized spatial two-stage least squares procedure for estimating a spatial autoregressive model with autoregressive disturbances. Journal of Real Estate Finance and Economics, 17(1), 99–121.CrossRefGoogle Scholar
  37. Kelejian, H. H., & Prucha, I. R. (2010). Specification and estimation of spatial autoregressive models with autoregressive and heteroskedastic disturbances. Journal of Econometrics, 140(1), 53–130.CrossRefGoogle Scholar
  38. Koh, H., Riedel, N., & Böhm, T. (2013). Do governments tax agglomeration rents? Journal of Urban Economics, 75, 92–106.CrossRefGoogle Scholar
  39. Lai, Y. (2010). The political economy of capital market integration and tax competition. European Journal of Political Economy, 26, 475–487.CrossRefGoogle Scholar
  40. La, Y. (2014). Asymmetric tax competition in the presence of lobbying. International Tax and Public Finance, 21, 66–86.CrossRefGoogle Scholar
  41. Lenk, T., & Rudolph, H. -J. (2004). Die kommunalen Finanzausgleichssysteme in der Bundesrepublik Deutschland: Der Ausgleich von Finanzbedarf und Finanzkraft. Arbeitspapier Nr. 27 Institut für Finanzen Finanzwissenschaft, University of Leipzig.Google Scholar
  42. Lorz, O. (1998). Capital mobility, tax competition, and lobbying for redistributive capital taxation. European Journal of Political Economy, 14, 265–279.CrossRefGoogle Scholar
  43. Olson, M, Jr. (1965). The logic of collective action: Public goods and the theory of public groups. Cambridge, MA: Harvard University Press.Google Scholar
  44. Osterloh, S., & Debus, M. (2012). Partisan politics in corporate taxation. European Journal of Political Economy, 28, 192–207.CrossRefGoogle Scholar
  45. Osterloh, S., & Heinemann, F. (2013). The political economy of corporate tax harmonization—Why do European politicians (dis)like minimum tax rates? European Journal of Political Economy, 29, 18–37.CrossRefGoogle Scholar
  46. Richter, B. K., Samphantharak, K., & Timmons, J. F. (2009). Lobbying and Taxes. American Journal of Political Science, 53(4), 893–909.CrossRefGoogle Scholar
  47. Revelli, F. (2006). Spatial interaction among governments. In: E. Ahmad & B. Giorgio (Eds.), Handbook of Fiscal Federalism (pp. 106–130) Cheltenham: Edward Elgar Publishing Ltd.Google Scholar
  48. Scherf, W. (2011). Öffentliche Finanzen: Einführung in die Finanzwissenschaft (2nd ed.). Wien: UTB GmbH.Google Scholar
  49. Swank, D. (2002). Funding the welfare state: Globalization and the taxation of business in advanced market economies. Political Studies, 46, 671–692.CrossRefGoogle Scholar
  50. Wilson, J. D. (1999). Theories of tax competition. National Tax Journal, 52(2), 269–304.Google Scholar
  51. Zimmermann, H. (2009). Kommunalfinanzen (2nd ed.). Berlin: Berliner WissenschaftsverlagGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of KasselKasselGermany
  2. 2.Institute for Innovation and Technology (IIT) as part of VDI/VDE Innovation + Technik GmbHBerlinGermany

Personalised recommendations