Tax Mimicking in the Short- and the Long-Run: Evidence from German Reunification
47 Pages Posted: 3 Feb 2015
Date Written: February 2, 2015
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: Suggested Citation