Working Paper: NBER ID: w31225
Authors: William C. Boning; Drahomir Klimsa; Joel Slemrod; Robert Ullmann
Abstract: German municipalities levy local business taxes by choosing a tax rate to apply to local business income, where the tax base is defined uniformly at the national level. Before the federal government’s imposition of a minimum tax rate in 2004, some municipalities such as the tiny North Sea town of Norderfriedrichskoog chose to act as tax havens by setting a zero tax rate. We combine administrative microdata from firm tax returns with municipality-level information to study the choice to become a tax haven; the (reported and real) income tax havens attracted from other municipalities before and after the introduction of the minimum tax rate; and how the introduction of the minimum tax rate affected tax competition between municipalities. We find that income was shifted to tax haven municipalities both before and after the introduction of the minimum tax rate. The mandated increase in tax havens’ tax rates did not lead to rate increases (or decreases) among municipalities in general, or among tax haven municipalities’ geographical neighbors. Our results suggest that tax havens largely did not affect the business tax rates set by non-havens.
Keywords: Tax Havens; Tax Competition; Minimum Tax Rate
JEL Codes: H25; H26; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of minimum tax rate (H26) | income shifting to tax haven municipalities (H26) |
| minimum tax rate introduction (H29) | tax rates of non-haven municipalities (H29) |
| tax haven rates (H26) | tax rates of neighboring municipalities (H29) |
| tax havens (H26) | business tax rates set by non-havens (H26) |