Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions

This paper provides empirical evidence on the tax base effects of local capital taxation. Using a large panel of German municipalities it tests whether both the local tax rate and the tax rate in adjacent jurisdictions affect the local tax base. The results obtained from a spatial GMM approach confirm a strong negative impact of the local tax rate, whereas the average tax rate of neighboring municipalities proves insignificant. Only if interacted with the relative population size of neighbors a significant positive impact is found, indicating that externalities from taxing decisions of adjacent jurisdictions are experienced only by relatively small municipalities. (C) 2003 Elsevier Inc. All rights reserved.