Tax Mimicking in the Short- and the Long-Run: Evidence from German Reunification

47 Pages Posted: 3 Feb 2015

Date Written: February 2, 2015

Abstract

This paper uses the quasi-experiment of Germany’s reunification to identify local tax mimicking by municipalities in Eastern-Germany. After reunification, East-German municipalities were allowed to independently set, for the first time in decades, local business and property tax rates. I explore whether the tax rates chosen by East-German border municipalities were influenced by the tax rates of adjacent West-German municipalities. To obtain causal estimates, I rely on instrumental variables regressions within the spatial lag framework, using West-German border municipalities’ tax rates in 1989 as instruments for their post-reunification tax rates. The results suggest that East-German municipalities mimicked business tax rates immediately after reunification, but not in later years. I find no evidence of mimicking for property taxes. These results indicate that mimicking is not an important determinant of local tax policy.

Keywords: Tax mimicking, Business taxes, Property taxes, German reunification

JEL Classification: H20, H71, H77

Suggested Citation

Baskaran, Thushyanthan, Tax Mimicking in the Short- and the Long-Run: Evidence from German Reunification (February 2, 2015). Available at SSRN: https://ssrn.com/abstract=2559295 or http://dx.doi.org/10.2139/ssrn.2559295

Thushyanthan Baskaran (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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