Fiscal federalism and tax enforcement

Timm Bönke, Beate Jochimsen and Carsten Schröder

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: In many federations, fiscal equalization schemes soften fiscal imbalances across the member states. Such schemes usually imply that a member state internalizes only a small fraction of the additional tax revenue from an expansion of the state-specific tax base, while the remainder of the additional tax revenue is redistributed horizontally or vertically. We address the question as to which extent state-level authorities in such a federation under-exploit their tax bases. By means of a stylized model we show that the state authorities in such a federation have incentives to align the effective tax rates of the state residents to the internalized marginal return from a stricter enforcement of the tax law. We empirically test the model using two approaches. In a state-level approach, we explore whether the state-specific internalized marginal returns matter for the states investments in tax enforcement. In a micro-econometric approach, using OLS regressions and natural-experiments, we explore whether internalized marginal returns matter for the effectiveness of the states tax enforcement activities, captured by the tax deductions granted to tax units. All our estimates support the results from our theoretical model.

JEL-codes: C21 H21 H77 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-acc, nep-iue, nep-law, nep-pbe, nep-pub and nep-ure
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Working Paper: Fiscal federalism and tax enforcement (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100394

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