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The Tax-Rate Elasticity of Local Business Profits

Discussion Papers 1424, 28 S.

Frank M. Fossen, Viktor Steiner


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Local business profits respond to local business tax (LBT) rates that vary across municipalities. We estimate that a one percent increase in the LBT rate decreases the LBT base by 0.45 percent, based on the universe of German LBT return files, which include corporations and unincorporated businesses. However, the fiscal equalization scheme largely compensates municipalities for the loss in the LBT base when they increase the LBT rate. Our estimates suggest that using taxrevenue data instead of tax return data, as commonly done in the literature, results in a significant bias of the elasticity away from zero.

Viktor Steiner

Head of Department in the Public Economics Department

Topics: Firms, Taxes

JEL-Classification: H25;H71
Keywords: Local business tax, corporate tax, tax responsiveness, tax-rate elasticity
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