The paper examines the magnitude of the vertical fiscal gap in Germany and its development over time and explores the drivers of this development from re-unification in 1991 until today. The results indicate a declining trend of the vertical fiscal gap. In the last decade, less than 10% of total subnational government expenditure is covered by vertical federal grants, over 90% is financed with own revenues, which is a large share by international standards. This development partly reflects fiscal consolidation but, primarily, is caused by an increase in revenue decentralization, fueled in particular by an increase of the subnational share of VAT revenues. We also explore how the vertical fiscal gap varies by state and find that the small gap for the country as a whole masks important differences across states. Half of all states display a substantial vertical fiscal gap, ranging between about 27% and 38%. Two states display a negative fiscal gap indicating that they transfer part of their own revenues to the federation.
We examine fiscal policies and parliamentary activities of minority governments in the German states. Our sample includes the German states over the period 1981-2024. The results show that minority governments implemented similar fiscal policies to majority governments. Minority governments had about 14 more parliamentary bills than majority governments, a result that is based on the activities of opposition parties and not of the minority governments. We conclude that minority governments have not performed worse than majority governments for a long time. We present case study evidence on minority governments in Thuringia and Saxony showing that a more fragmented party system makes it more difficult for minority governments to perform well and implement their policy goals. Future research should investigate in more detail the performance of minority governments in times of fragmented party systems.
The 2017 Tax Cuts and Jobs Act (TCJA) slashed corporate tax rates on equity-financed investments while raising them sharply on debt-financed investment. This study examines the tax reform's impact on the volume and composition of U.S. inbound foreign investment during 2014-2019 using regression analysis of bilateral effective average and marginal tax rates. We find that TCJA affected inbound investment, especially incremental investment by existing foreign-owned companies: Retained earnings rose due to lower equity tax rates, while expansions and tangible investments responded to both equity and debt tax changes. Foreign acquisitions and new establishments were not significantly impacted, and industry-level analysis shows an attenuated effect of effective tax rates. We also find that bilateral cross-border tax rates with the country of ultimate beneficial ownership correlate more strongly with investment than bilateral rates with intermediate jurisdictions.
This study examines how different dynamic audit strategies affect tax evasion within an agent-based model embedded in a small-world network, where the only enforcement mechanism is a dynamic audit cutoff rule. Taxpayers attempt to identify the cutoff by observing their social networks, in which information about audits spreads, and adapting their own behavior accordingly. Results show that increased uncertainty can reduce the intensity of evasion-i.e., the average amount evaded per person-but not necessarily its incidence, meaning the share of taxpayers who evade at all. Different uncertainty mechanisms may interfere with each other, highlighting that the structure of uncertainty matters more than its mere presence.
This paper studies whether the landmark ruling "Radmacher v Granatino 2010" changed tax non-compliance by married self-employed individuals in the UK through an increase in the enforceability of marriage contracts. I argue that the probability of divorce and the probability of marriage contracts being enforceable influence married self-employed individuals' tax non-compliance behaviour as they try to hide income from their spouses. Using a theoretical model, I show that a higher probability of marriage contract enforceability leads to less income being hidden, while a higher probability of divorce results in more concealment. Additionally, the model predicts that higher tax rates increase the incentive to underreport income. A difference-in-differences analysis comparing married self-employed and married employed households in the UK suggests that the Radmacher v Granatino ruling however did not seem to significantly reduce income misreporting among married self-employed households.
