Work in Progress

This paper investigates the short- and medium-term causal impact of austerity on local fiscal, economic, and political outcomes. We exploit a 2013 state-level austerity program in Hesse, Germany and manually code 2,900 consolidation measures for 86 municipalities, distinguishing between tax- and expenditure-based strategies. Using synthetic difference-in-differences (SDID) estimations, we compare treated municipalities to a control group of 4,630 municipalities in states without an austerity program. Overall, treated municipalities consolidate through tax hikes (business +12%, property +65%) and expenditure cuts (personnel -6%, investments -62%). Austerity generally stabilizes municipal finances but hurts labor markets (number of firms -13% , salaries -9% , jobs -6%). Economic costs vary across consolidation strategies: tax-based consolidation reduces business tax bases and employment, while expenditure-based consolidation depresses apartment rents. Political costs arise only when consolidation relies heavily on a single instrument.

A broad empirical literature examines the impact of corporate taxes on firms’ investment, location, and tax avoidance behavior. By contrast, relatively little is known about how corporate taxation affects firms’ performance in international product markets. In this paper, we use administrative customs and tax return data from South Africa to study how corporate taxes shape export outcomes and firm competitiveness. Drawing on a difference-in-differences design, we show that exports by South African firms decline significantly when foreign competitors—serving the same destination market within the same 6-digit product category—experience a corporate tax rate cut. Further analyses indicate that reductions in competitors’ tax costs translate into real activity losses for South African exporters and lower income earned by corporate owners and workers.

This paper provides event-study evidence on the dynamics of strategic tax-policy interactions. Using the participation of German municipalities in state debt reduction programs as an exogenous shock, we demonstrate how these programs affect tax rates of participating municipalities. We then show how competing municipalities -- not directly affected by the program -- adjust their tax rates in response. Combining both steps using a two-sample Wald estimator, the strategic response of competitors to a one-unit tax change by program participants ranges from 0.66 to 0.70 for the local business tax and 0.34 to 0.49 for the property tax. Characteristics of municipalities, especially proximity, influence the size and scope of tax interdependence.

This paper investigates the (heterogeneous) investment responses to corporate tax policy changes using novel country-industry-year-specific forward-looking effective tax rates (FLETRs) based on a panel of 11 industries, 70 countries, and the years 2001 to 2018. These novel FLETRs account not only for the statutory tax rate and base but also for typical country-industry-specific financing and asset structures. We show that commonly used FLETRs suffer from significant measurement error when financing and asset information is omitted, mainly due to misassigned asset weights in depreciation allowances. Exploiting substantial variation in FLETRs over time, we estimate the tax semi-elasticity of corporate investment in tangible fixed assets. Based on over 24 million firm-entity observations, our results suggest a statistically significant tax semi-elasticity of -0.41, which is at the lower end of previous findings. In a second step we identify substantial heterogeneity in investment responses for across firm subgroups. 

This paper empirically investigates whether governments are substituting from corporate to consumption taxation due to tax competition using a novel self-collected data set of corporate and consumption tax regime information. I estimate the slope of the tax policy reaction function between corporate and consumption tax rates exploiting the cross-sectional interdependence of corporate tax rates for an instrumental variable approach. Additionally, I analyze the rate-revenue relationship of both tax instruments to evaluate the overall revenue implications of corporate tax competition. I find that, on average, a one percentage point decrease in the corporate tax rate leads to a 0.35 percentage point increase in the consumption tax rate. The rate-revenue relationship of both corporate and consumption tax rates follows an inverted U-shape. Furthermore, governments can fully compensate for revenue losses from tax competition by substituting to consumption taxation. These results indicate that the debate on corporate tax competition may overstate efficiency considerations and underestimate equity concerns. 

Border adjustment taxes like the value-added tax (VAT) are commonly regarded to be non-distortionary due to their de jure trade neutrality. We analyze the effects of the VAT on trade in final goods in the European Union (EU) from 1988 to 2019. Using a gravity approach we find that the VAT is de facto non-neutral. A one percentage point VAT increase implies a 5.45\% reduction of foreign imports relative to internal trade. While institutional quality, EU accession, and preferential Common Market access cannot explain the over-proportionate reduction in imports, we provide evidence that foreign firm exit drives non-neutrality. 

This paper studies the real effects of property taxation on housing markets using variation in municipal property tax rates in Germany. I exploit a distinctive institutional feature of the German system: assessed property values were fixed at historical base years and did not adjust to current market conditions, allowing tax rate changes to be analyzed independently of reassessments. Using more than 20,000 municipal tax rate changes between 2004 and 2018 in a stacked event-study design, I estimate the effects of property tax increases on the local tax base, housing supply, and population. Property tax increases reduce the local property tax base and population, with no evidence of differential pre-trends. A one percent increase in the tax rate lowers the tax base by 0.11 percent and population by 0.036 percent. I also document sizable spillovers: neighboring municipalities experience increases in population, housing supply, and the tax base. The results indicate that property tax differentials induce spatial reallocation of residents and housing capital across jurisdictions.

This paper studies how salience affects local policy choices. We exploit quasi-experimental variation across German Länder in the salience of key reference rates available to municipalities. While selecting a reference rate has no financial advantage, municipalities are 12 percentage points more likely to adopt exactly the rate when it is made salient. We show that differences in communication and institutional complexity shape the strength of salience effects. To rationalize the results, we provide evidence that salient rates operate as a coordination devices, creating a convergence point in fragmented local councils. Overall, the findings indicate that salience plays a substantially larger role in shaping local fiscal decisions than is implied by standard models based on material incentives alone. 

Profits are often created from activities across multiple jurisdictions. What is the optimal division of tax revenues across these jurisdictions? This paper addresses this question theoretically and empirically. First, we propose a new welfare function for fair division of profit tax revenues across jurisdictions, where jurisdictions' claims to revenue depend on how much of multinational corporations' capital, labour and sales are located within the jurisdiction. Second, we show how this theory can be applied to the optimal division of revenues when taxation distorts location decisions of corporate activities. Third, to speak to the extent of location responses, we exploit data on multinational corporations in the EU to estimate the current distribution of activities and the responsiveness of each activity to tax rate differentials. Fourth, using these results, we simulate optimal divisions of revenues for the EU under formula apportionment.