Revenue Boosting Instruments in Municipal Finance from a Public Choice Perspective
Peter Haug
Diamond, J. (ed.), Proceedings. 98th Annual Conference on Taxation, Miami, Florida, November 17-19, 2005 and Minutes of the Annual Meeting of the National Tax Association, Thrusday, November 17, 2005,
2006
Abstract
German municipalities are currently struggling with growing budget deficits, decreasing revenues, and rising expenditures. We argue that from a public choice perspective local politicians under financial pressure might prefer fiscal instruments that minimize the local voters' resistance and create fiscal illusion. According to Germany, suitable sources of additional revenues include the reallocation of revenues from the local business tax between the levels of government and increased profitability of local public utilities. Revenue Data from 1992 to 2004 indicate that changes in the relative significance of the net local business tax revenues are rather caused by changes in the share of the federal government in the revenues ('Gewerbesteuerumlage') than by changes in the local tax multipliers. Furthermore, we find a significant rise in profits of local public utilities in large German cities.
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