ABSTRACT. A municipal merger induces a discontinuous change in the distance from local actors to the local center of power. In this paper, we analyze the impact of municipal mergers on local economic activity through a change in this distance. We exploit a large dataset covering more than 2.300 municipal mergers and 500 municipal separations in Germany over the period 1998-2013. Overall, we find significant evidence that a smaller (larger) distance to the local center of power leads to an increase (decrease) in local economic activity.

ABSTRACT. This paper quanties the impact of public employment in local labor markets in the long-run. We follow two dierent quantitative approaches that we apply to the case of Spanish cities. In the first one, we develop a 3-sector (public, tradable and non-tradable) search and matching model embedded within a spatial equilibrium model. We characterize the steady state of the model which we then calibrate to match the labor market characteristics of the average Spanish city in 2001. Then, we use the model to simulate the local labor market eects of expanding public sector employment in a city. In second empirical approach, we use regression analysis to estimate the eects of public sector job expansions on decadal changes (1980-1990 and 1990-2001) in the employment and population of Spanish cities. This analysis exploits the dramatic expansion of public employment that followed the advent of democracy in the 1980-2001 period. The instrumental variables' approach that we follow uses the capital status of cities to instrument for changes in public sector employment. The two empirical approaches yield qualitatively similar results and, thus, cross-check each other. One additional public sector jobs creates 1.2 to 1.4 private sector jobs. However, these new jobs do not translate into a substantial reduction of the local unemployment rate as better labor market conditions attract new households to the city. Increasing public employment by 50% only reduces unemployment from 15.6 to 14.9-15%.

ABSTRACT. We study the fiscal consequences of municipal mergers by making use of a largescale merger reform in the German federal state of Brandenburg. This reform, which was implemented from 2001 to 2003, led to a substantial reduction in the number of municipalities. Individual mergers were heterogeneous across a number of dimensions, which allows us to contribute to the literature by exploring the consequences of different types of mergers within the same institutional setting. Focusing in particular on the distinction between compulsory and (semi-) voluntary mergers, we implement a difference-in-difference design with panel data from 1995-2010 at the level of postmerger municipalities. We find significant reductions in (administrative) expenditures after compulsory mergers. Voluntary mergers, on the other hand, have no effect on expenditures. We also show that the effects of voluntary and compulsory mergers vary according to further (secondary) characteristics of a merger.

ABSTRACT. The severity of the recent crisis has given rise to several proposals for the creation of a European unemployment insurance system. In this paper, we first explore the theoretical backgrounds of a common insurance system. We, then, analyze the main features of an EU-wide unemployment insurance, and explore its financial and political sustainability, under different scenarios, including a “US-equivalent” one. We finally highlight key issues with regard to implementation and potential undesirable effects.

ABSTRACT. We develop a new modelling approach to analyse redistributive and stabilizing effects of a European Unemployment Benefit Scheme (EUBS). We run counterfactual simulations based on micro data for the period 1995 to 2013 to estimate redistributive effects of different variants of EUBS within and across European member states. Our micro estimates are then used to feed the macro-econometric model in order to obtain counterfactual evolutions of income and unemployment. These new income and employment series are finally simulated again at the micro level. We compare partial and general equilibrium results and discuss the relevance of accounting for macroeconomic feedback effects.

ABSTRACT. We analyze different options for the design of a common unemployment insurance system for the euro area (EA). We assess their effectiveness to act as an insurance device in the presence of asymmetric macroeconomic shocks. Running counterfactual simulations based on micro data for the period 2000-13, we quantify the trade-off between automatic stabilization effects and the degree of cross-country transfers. In the baseline, we focus on a non-contingent scheme covering short-term unemployment and find that it would have absorbed a significant fraction of the unemployment shock in the recent crisis. However, four member states of the EA18 would have been either a permanent net contributor or net recipient. Our results suggest that contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance effects. We also study heterogeneous effects within countries and discuss moral hazard issues at the level of individuals, the administration and economic policy.

ABSTRACT. Profit taxation affects corporate investment decisions through several channels. This paper focuses on the impact of corporate income flat tax reforms on businesses' location choices. Since 1990, Swiss states (cantons) have been switching from a graduated to a flat tax rate scheme on profits. The paper assesses the effects of such a reform on the number of establishments by computing a difference-in-differences estimation. Our results show a negative impact on the number of firms in a given jurisdiction. Interestingly, the effect is considerably larger for riskier firms, suggesting the presence of an insurance effect from progressive taxation for risk-averse entrepreneurs.

ABSTRACT. Using CORTAX, a computable general equilibrium (CGE) model designed to assess the economic impact of corporate taxation, we examine the possible economic impacts of uncoordinated and coordinated changes in national corporate tax rates among a group of economies (the EU) that are tightly associated through international trade and investment. The aim is to contribute to the ongoing debate about the desirability, modality and likely impact of alternative policy solutions to the challenges posed by tax competition and aggressive tax planning. Corporate income tax rates can generate substantial responses within the implementing country as well as beyond its own borders. Harmonisation of CIT rates would likely involve winners and losers, and as such, may be best pursued gradually and as part of a broader package of corporate tax reform.

ABSTRACT. Taxing capital gains is an important obstacle to the efficient allocation of resources because it imposes a transaction cost on the vendor which locks in appreciated assets by raising the vendor’s reservation price in prospective transactions. For M&As, this effect has been intensively studied with regard to shareholder taxation, whereas empirical evidence on the effect of capital gains taxes paid by corporations is scarce. This paper analyzes how corporate level taxation of capital gains affects inter-corporate M&As. Studying several substantial tax reforms in a panel of 30 countries for the period of 2002-2013, we identify a significant lock-in effect. Results from estimating a Poisson pseudo-maximum-likelihood (PPML) model suggest that a one percentage point decrease in the corporate capital gains tax rate would raise both the number and the total deal value of acquisitions by about 1.1% per year.

ABSTRACT. Across Europe, there is a ongoing discussion about how far European Integration should pushed forward and how far financial solidarity, e.g. for crisis-struck countries should go. We study preferences of German citizens on two European-wide redistribution measures which should reveal the existence of a sense of fiscal solidarity. We find that socio-economic characteristics, support of the German fiscal equalization scheme and partially altruism and trust in the EU do in uence the support of redistributive measures across Europe. In contrast less supportive evidence is found for exclusively national sentiments.

ABSTRACT. Highly centralised countries like Italy and Spain have devolved fiscal power to regions in an asymmetric way. Some well-off regions get transfers that turn them into net recipients of the fiscal system. We demonstrate in a political economy model of fiscal federalism that in centralised countries, side-payments are used to compensate regions that are set back by the fiscal system and can credibly threaten to secede. Compensation blocks political negotiation on alternative –more efficient– fiscal systems. We study two regions, Valle d’Aosta in Italy and País Vasco in Spain, as an example.

ABSTRACT. We investigate the relationship of the wage a successful candidate receives when winning an election and the average quality of candidates using a sample of the personal characteristics of all candidates running for the position of the mayor at local elections in the German state of Baden-Wuerttemberg. Various proxies including both detailed information on educational degrees and specific fields of education and occupation are employed to measure quality. Our findings suggest that a politician's remuneration is positively correlated with candidate quality: In particular the share of high educated candidates (e.g., candidates holding a PhD) and the share of lawyers increases with increasing remuneration.

ABSTRACT. The paper integrates the Asdrubali et al. (1996) approach in a 2-region model of monetary union to analyse the potential contribution of cross-border fiscal transfers without own borrowing capacity to income and consumption smoothing across member states. The transfers increase the fiscal space of national governments when debt issuance is very costly or fiscal limits are tight, hence, reduce the pro-cyclicality of fiscal policy at the national level. The simulations suggest that fiscal transfers crowd out private channels, however, so that net stabilisation gains remain modest.

ABSTRACT. In this paper we investigate the role of rainy-day funds and transfers in a fiscal union. We begin by examining a country in autarky and considering its savings and funding decision for a rainy day fund. We then introduce a fiscal union and examine how the introduction of the union affects the rainy day fund. We find that contributions to a rainy day fund will be lower in a fiscal union, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. Is there an optimal size of the fiscal union in the sense of the size of the transfers involved? We find that there is. The trade-off is that members of the union benefit from the insurance provided by the union, but suffer because it reduces their contributions to their own rainy-day funds. We find that the optimal size of transfers in the fiscal union depend on a number of factors. In particular, member countries should have lower transfers if (1) own-fiscal policy is more effective; (2) rainy-day fund savings are highly (negatively) influenced by the presence of the transfers; (3) recession is a relatively lower probability event; and (4) redistribution yields a lower utility gain in the union. We also find that commitment to a transfer policy is an issue. A union that is prone to break the rules on transfers negatively impacts the contribution of individual member country’s rainy day funds.

ABSTRACT. This paper studies the effect of personal remittances on tax revenues and tax policy in receiving countries. International flows of remittances exceed world-wide devel- opment assistance and are of major economic importance to many low and middle income countries. Although remittances potentially are an important source of tax revenue, there is a lack of evidence on the effect of remittances on public finances in receiving countries. We exploit oil-price-induced exogenous variation in remittances to show that remittances have a large and persistent effect on revenues generated from value-added and/or sales taxes but no significant effect on income- tax revenues. This suggests that remittances often escape the income tax but can be taxed via consumption. We then show that governments' tax policy is also re- sponsive to shocks in incoming remittances: higher inflows of remittances lead to lower value-added-tax rates, but higher (and more progressive) personal-income-tax rates.

ABSTRACT. Which factors influence individual tax avoidance and evasion decisions? Do individuals learn about tax avoidance opportunities over time? We analyze the extent of bunching behavior in personal income taxes exploiting administrative tax data from Ecuador. Due to the unique setting of a rapidly formalizing economy and an expansion in the number of taxpayers, we assess the effects of experience in tax paying on individual tax-filing behavior. Our results show that being experienced in terms of filing tax declarations indeed increases the chance of locating oneself just below the first kink of the marginal tax schedule (“bunching”). This bunching is almost entirely driven by reporting behavior, with individuals exploiting generous deduction opportunities. Moreover, we look at the channels through which taxpayers learn about these tax avoidance opportunities. Exploiting individuals who move between firms, regions and industries, we analyze the effects of coworker/neighbor bunching shares on individual bunching behavior. We find very strong effects of bunching spillovers at the firm level. Our paper further develops a fully data-driven method to endogenously determine the size of the bunching region around the kink in the tax schedule.

ABSTRACT. This paper characterizes the optimal labor income taxes in an environment where individual labor supply choices are subject to frictions. Agents incur a fixed cost of adjusting their hours of work in response to changes in their idiosyncratic wages or the tax rates. This fixed cost can be thought of as the cost of searching for a new job in an economy where hours are constrained within the firm. I derive a formula that characterizes the optimal long-run progressive tax schedule in this economy. Adjustment frictions generate endogenously an extensive margin of labor supply conditional on participation. In addition to the standard intensive margin disincentive effects of taxes, the optimal tax schedule takes into account their effects on the endogenous option value of adjusting hours of work, and therefore depends on several new elasticities and marginal social welfare weights. I evaluate the quantitative magnitude of these novel theoretical effects and show that for a given intensive margin labor supply elasticity, the optimal long-run tax schedule is less progressive than a frictionless model would predict. The welfare miscalculations by wrongly assuming that labor supply is frictionless can be large, and are decreasing in the size of the intensive margin labor income elasticity.

ABSTRACT. This is the first paper to thoroughly investigate the employment effects of corporate taxation. Higher taxes are theoretically shown to have a negative impact on employment through reduced investments, if labor is regionally mobile. I test this prediction by exploiting the specific setting of local business taxation in Germany, where on average 10% of the 11,441 municipalities change their tax rate each year. Relying on rich administrative linked employer-employee panel data, I provide non-parametric and parametric evidence that employment declines if business tax rates increase. For given wages, a one euro increase in an establishment's tax bill leads to a reduction in the wage bill by 20 cents over two years. I empirically show that the negative employment effect is triggered by reduced (net) investments and leads to lower production levels.

ABSTRACT. Using a novel dataset for sub-sovereign governments including Australian states, Canadian provinces, Swiss cantons, German Länder, US states, Spanish communities, and Indian states, we investigate to what extent bond yield spreads of such sub-sovereign issuers are driven by bailout expectations and investors’ risk appetite rather than their fundamentals related to default risk. In our empirical framework, we study this question both across and within federations. We find that independent of the prevailing federal system, sub-sovereign debt levels relative to GDP and global risk aversion are both important drivers of sub-sovereign spreads. Within federations, the willingness and capacity of the federal government to bail out sub-sovereigns in financial difficulties affect the extent to which fundamental factors are priced into spreads. We find in particular that higher sub-sovereign debt levels seem to increase the willingness of the federal government to bail out the respective sub-sovereign government: if sub-sovereign government debt rises to above-median levels, the positive link between debt and risk premia breaks down. Larger sub-sovereign entities however pay higher premia as fundamentals worsen because the capacity of the federal government to provide bailouts is reduced. A similar pattern is found for sub-sovereign entities whose central government faces borrowing constraints. Our findings are robust to alternative specifications which also control for liquidity risk premia in sub-sovereign bond markets.

ABSTRACT. This paper analyzes the ditribution of discretionary grants in the process of local fiscal adjustment after negative revenue shock in formula transfers. Spanish local governments experienced revenue-sharing revenues to fall by more than 30% at the beginning of the Great Recession. We rely on a ‘difference-in-discontinuities’ design (see Nannicini, Grembi, and Troiano, 2016) to identify the causal effect of that shock on the amount of discretionary grants provided by several higher layers of government (i.e., central, regional, provincial) and on other budget items (i.e., spending, taxation). Our method takes  advantage of some traits of the revenue-sharing transfer that generate larger losses during crisis for municipalities above the 5,000-population threshold. Despite of this, we find that, on average, municipalities above and below 5,000 did not differentially adjust their budget during the crisis. Instead, we find that for the most indebted municipalities, a substantial share of the shock was absorbed by regional and provincial discretionary grants.

ABSTRACT. We analyze how reforms of tax-benefit systems in the period 2007-2013 have affected the automatic stabilization capacity in the EU-27 based on harmonized European micro data and counterfactual simulation techniques. Factors like unemployment benefits or (progressive) income taxes can stabilize individual (and aggregate) income and smooth consumption demand in case of income or unemployment shocks. Our analysis allows to disentangle automatic changes in net government intervention from those that take place after explicit government legislature (discretionary changes) as well as changes in actual incomes and behavioral responses. We find automatic stabilizers to be generally heterogeneous across countries—both in levels and in terms of policy changes over the crisis. Stabilization coefficients vary from less than 25% in Eastern European countries to almost 60% in Belgium, Germany, and Denmark. We discuss the implications of our results for post-crisis recovery.

ABSTRACT. We analyze whether the nationalities of EU Commissioners influence budget allocation decisions in favor of their country of origin. This is inherently difficult as no country related data on budget allocations for individual Commissioners are published by the EU. We are the first to propose a solution to this problem by using data on EU funds allocation and focusing on the Commissioners for Agriculture, who are exclusively responsible for a specific fund that accounts for the largest share of the overall EU budget. On average, providing the Commissioner is associated with increases in a country's share of the overall EU budget of about one percentage point, which corresponds to half a billion Euro per year. We consider alternative explanations using flexible country-specific time trends in addition to country and time fixed-effects and examining pre- and post-treatment effects. There are no signs of selection bias in terms of significant differences in trend behavior both before and after providing the Commissioner. The results are not driven by any individual country, and selection-on-unobservables would have to be implausibly high to account for the estimated coefficient.

ABSTRACT. EU taxes as potential own resources for the EU have been an issue in the economic and policy debate for quite a while. They have been advocated as revenue instruments that may strengthen fiscal autonomy, legitimacy and accountability of budget policy at the EU level. Moreover, the partial substitution by EU own resources by own EU taxes is seen as a lever to make the EU system of own resources more transparent and less complicated. The paper elaborates the potential role of own EU taxes to strengthen the four dimensions of sustainability – economic, social, environmental, and institutional/cultural – of taxation in the EU, which has been almost completely neglected in the discussion about reform needs and options of the EU system of own resources up to now. We then develop innovative sustainability-oriented evaluation criteria and suggest indicators to assess economic, social, environmental and institutional/cultural sustainability of candidates for own EU taxes.

ABSTRACT. We provide an empirical study analysing the distribution of EU funds among 2478 Polish municipalities between 2009 and 2011. We find EU funds to be concentrated in smaller municipalities and economically weak subregions. At the same time, expenditures of EU funds are found not to depend on the fiscal capacity of the municipality. This indicates that co-funding restrictions imposed by the EU did not prevent fiscally weak municipalities from applying for EU funds. Our primary focus rests on the question whether regional governments use their prominent role in the allocation process for EU funds to support their own political self-interest. The answer is affirmative: Municipalities aligned with the regional government spend more EU funds per capita than non-aligned municipalities.

ABSTRACT. In this paper we study the effects of various tax schedule discontinuities on the behavior of small firms using high-quality, population wide tax register data from South Africa. We use bunching analysis to study these discontinuities. We examine how the VAT threshold affects the sales distribution of firms. We also study the effects of two separate corporate income tax rate kinks. We find sizable bunching at each of these thresholds. This implies that small firms are well aware of these tax schedule discontinuities, and react to these by adjusting their behavior.

ABSTRACT. Using panel data on the population of corporate tax-returns of Armenian firms, we study the behavioral response of firms to three size-dependent regulations: i) a tax-notch created by the value added tax (VAT) registration threshold; ii) an administrative-notch below which the frequency of filing and paying VAT and corporate income taxes declines from monthly to quarterly; and iii) an accounting-notch where International Financial Reporting Standards become mandatory. We find strong bunching evidence at the latter treatment, a moderate response to the administrative-notch, and no response to the VAT-notch. Based on the results of tax-audits -- performed at about every fifth firm each year -- we provide evidence suggesting that the bunching-response of firms is almost entirely driven by income under-reporting. This battery of evidence suggests that in a developing country with weak enforcement environment tax administration may matter more for firms' decisions than taxes.

ABSTRACT. Increasing inequality in recent decades has triggered a heated debate on whether wealth transfer taxation is an appropriate countermeasure to the perpetuation of inequality. A major factor in making progress in this discussion is understanding how taxpayers respond to incentives generated by wealth transfer taxes. Using administrative tax records from Germany, this paper investigates behavioral responses to a very large transfer tax kink in the inheritance and inter vivos gift tax schedule. We find sharp bunching of taxable inheritances and even larger bunching of taxable inter vivos gifts. However, because the kink is large, the underlying taxable inheritance and gift elasticities are moderate and amount up to 0.11. In line with the notion of accidental bequest models, further evidence suggests that the amount of wealth bequeathed is uncertain. This may explain the small size of the inheritance elasticities. Based on the results, the present paper lends strong support to the hypothesis that wealth transfers are relatively inelastic along the intensive margin in the short term.