Essays in public finance

Abstract

This thesis consists of three independent essays in public finance. While differing in methodology and scope, the essays are unified by their topicality in the policy discussion The first chapter discusses the interaction between tax competition and the intensity of profit shifting, modelling heterogeneity between countries and across firms. The project is motivated by recent policies that allow for a limited degree of profit shifting in order to mitigate production inefficiencies, which are a common side-effect of profit shifting restrictions. By modelling strategic effects in a general equilibrium model of tax competition, my model challenges the effectiveness of policies with limited profit shifting. In a second contribution, I show that marginal profits from allowing for limited profit shifting are concentrated on firms with an intermediate degree of mobility. The concentration result is new to the literature and could explain the introduction of limited profit shifting policies in settings, in which the headline rationale is incapable of. The second chapter, co-authored with Rafael Barbosa, addresses the puzzle that, despite its theoretical merits, Land Value Taxation (LVT) is not a common policy instrument in most countries. One of the main reasons is uncertainty regarding its distributional impacts. This uncertainty has not been settled by the literature, due to a lack of appropriate data. We overcome this obstacle by the construction of a unique household level dataset for a sample of German homeowners in 2017 and use the data to study the distributional effects of implementing a LVT compared to a standard property tax. We find a LVT to be equally progressive if implemented at the federal level, but less progressive if implemented at the regional level. Quantitatively a revenue-neutral reform from a standard property tax to a LVT would increase the average tax burden of the lowest income quintile of homeowners by 25%. In the third chapter I discuss a pattern in local business tax rates, which so far has been largely overlooked by the literature: Differences in tax rates between neighboring municipalities of similar size, Twin Tax Differences (TTD). First, I show this pattern to be a significant phenomenon in local business taxation: About 35% of the 11,000 German municipalities have a TTD of at least two percentage points. Second, I provide a novel theory for the emergence of TTD as an outcome of tax competition between adjacent, fully homogeneous municipalities. Based on the analysis, I argue how TTD, and the mechanisms behind, should impact public policies, both in terms of redistribution and incentive provision.