The Revenue and Base Effects of Local Tax Hikes: Evidence from a Quasi-Experiment

38 Pages Posted: 13 Sep 2015

Date Written: September 11, 2015

Abstract

This paper studies the revenue and base effects of local property and business tax hikes using a natural experiment in the German state of North Rhine-Westphalia (NRW). Due to a reform of the local equalization scheme in 2003, a set of municipalities in NRW increased their local tax rates by one to two percentage points while the remaining municipalities kept their rates constant. Using this variation across municipalities and over time to implement a difference-in-differences design covering the period 1995-2010, I find that property tax hikes have a revenue elasticity of unity and no adverse base effects. Business tax hikes have no discernible base effects but also no statistically significant effect on revenues. Furthermore, the results suggest that the tax hikes have no effect on broader economic outcomes such as local employment, firms’ wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.

Keywords: Tax hikes, Tax base effects, Local business taxes, Local property taxes

JEL Classification: H20, H71, H77

Suggested Citation

Baskaran, Thushyanthan, The Revenue and Base Effects of Local Tax Hikes: Evidence from a Quasi-Experiment (September 11, 2015). Available at SSRN: https://ssrn.com/abstract=2659196 or http://dx.doi.org/10.2139/ssrn.2659196

Thushyanthan Baskaran (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
32
Abstract Views
491
PlumX Metrics