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Fiscal interactions in the short and the long run: evidence from German reunification

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This paper uses the quasi-experiment of Germany’s reunification to test for strategic interactions in local taxation. After reunification, East-German municipalities were allowed to choose, for the first time in decades,… Click to show full abstract

This paper uses the quasi-experiment of Germany’s reunification to test for strategic interactions in local taxation. After reunification, East-German municipalities were allowed to choose, for the first time in decades, local business and property tax rates. I explore whether the tax rates they chose were influenced by the tax rates in adjacent West-German municipalities. The results show that East-German municipalities mimicked the business tax rates of their western neighbors immediately after reunification, but not in later years. I find no evidence for interactions in property tax rates. These results are broadly consistent with models of social learning in fiscal policy.

Keywords: german municipalities; tax rates; evidence; fiscal interactions; reunification

Journal Title: Journal of Economic Geography
Year Published: 2019

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