Fiscal Externalities in Local Tax Competition: Empirical Evidence from a Panel of German Jurisdictions

This paper is concerned with scal externalities arising from local taxation of a mobile factor. Using a panel of more 1100 local jurisdictions it provides empirical evidence on how the local tax rate as well as the tax rate in the neighborhood a ect the local tax base. The results support the existence of scal externalities: an increase in the tax rate of local neighbors exerts a positive e ect on the tax base whereas an increase of the own tax rate has a negative e ect, and a joint increase of the tax rate at the local jurisdiction and in its neighborhood has no signi cant e ect on the interjurisdictional distribution of the tax base. However, in the considered case tax competition is alleviated by revenue sharing rules which reduce the jurisdictions' incentive to lower tax rates in order to attract capital.