Unemployment disparities and regional wage flexibility: comparing EU members and EU-accession countries

This paper provides empirical evidence on regional labor market flexibility in Europe and, in particular, in the EU-accession countries in Central and Eastern Europe. Whereas substantial regional disparities in unemployment are found for pre-accession EU member countries as well as for accession countries, an empirical analysis taking account of spatial effects shows that regional wage flexibility is significantly higher for accession countries. Moreover, unemployment disparities are found to be less persistent in the accession countries.

Symposium on New Directions in Fiscal Federalism: An Introduction

Issues of fiscal federalism—broadly defined to includethe tax, expenditure, and debt policies of different levelsof government, as well their interaction—have attractedheightened attention from academics and policymakers alike.Global changes in institutional structures and economic conditionswithin and among countries, including fiscal, economic and politicalreforms, have highlighted the importance of the division offiscal and political responsibilities among governments. Competitionamong governments, as well as the development and evolutionof mechanisms of horizontal and vertical fiscal coordinationand cooperation among them, have been the subject of a rapidlydeveloping literature. Better understanding of the fiscal policiesand interactions of governments, and of their institutionaland political underpinnings, presents deep intellectual challengesas well as opportunities for useful policy applications. The five papers in this symposium are a selection of papersbased on keynote addresses presented at a September 2006 conferenceon "New Directions in Fiscal Federalism"     

Nach der Wahl: Was sind die wichtigsten wirtschaftspolitischen Herausforderungen?

Even though Germany’s economy is currently going strong, the country still faces enormous challenges if it wants to maintain and increase this prosperity. The new government should take this opportunity to set the course for the future by encouraging the digitalisation of the economy and the society as well as by ensuring that the ongoing energy transition is sustainable and efficient. Other challenges include the adverse effects of globalisation on parts of society and the uneven distribution of income and wealth. But the actual magnitude of the government’s room to manoeuver is up for debate. The new government’s fiscal space might be more limited than it seems, since an automatic adjustment of the income tax to inflation and growth is required to end the bracket creep. Given that transfer programmes are being phased out, the federal income tax surcharge to finance German unification also needs to be abolished. Further budget pressure stems from the pension system and from demands by state and local as well as European governments. The new German government should use the next governing period to initiate fundamental reforms of economic and fiscal policy that will provide adequate answers to long-run challenges.     

Übernivellierung der Einnahmen aus der Grunderwerbsteuer im künftigen Finanzausgleich

Fiscal Equalisation in Germany provides substantial fiscal redistribution between federal and state and among state governments. However, there is also a degree of tax autonomy for the individual German states. Since 2007, states can adjust their local rate of the Real Estate Transfer Tax. However, if they keep the rate low, they may suffer revenue losses due to fiscal redistribution. The paper considers whether this effect will also be present in the new rules for fiscal equalization which will come in to effect in 2020.     

Neuregelung des bundesstaatlichen Finanzausgleichs: Umverteilungs- und Verbleibseffekte

The paper explores effects of the revision of the system of fiscal equalisation in Germany as recently agreed upon by the federal and state governments. More specifically, using a simulation analysis, it explores the distribution of gains and losses associated with changes in horizontal and vertical fiscal flows. In addition, the paper determines the degree of fiscal redistribution. While the degree of fiscal redistribution is found to be reduced for major revenue sources, local tax revenues are subject to much higher redistribution than under the status quo. Increases in local tax revenues might even result in total revenue losses for some states.     

Revenue Forecasting Practices: Differences across Countries and Consequences for Forecasting Performance*

This paper reviews the practice and performance of revenue forecasting in selected OECD countries. It turns out that the cross‐country differences in the performance of revenue forecasting are first of all associated with uncertainty about the macroeconomic fundamentals. To some extent, they are also driven by country characteristics such as the importance of corporate and (personal) income taxes. Also, differences in the timing of the forecasts prove important. However, controlling for these differences, we find that the independence of revenue forecasting from possible government manipulation exerts a robust, significantly positive effect on the accuracy of revenue forecasts.     

The role of the corporate income tax as an automatic stabilizer

This paper analyses the effectiveness of the corporate income tax as an automatic stabilizer. It employs a unique firm-level data set of German manufacturers combining financial statements with firm-specific information about credit market restrictions. The results show that approximately 20 per cent of all firms report both positive taxable income and capital market restrictions. Taking account of the income tax rates and the size differences of the firms, we find that demand stabilization through the corporate income tax amounts to about 8 per cent of an initial shock to gross revenues. This stabilization effect varies over the business cycle and tends to increase during cyclical downturns.     

Restricted interest deductibility and multinationals’ use of internal debt finance

This paper reconsiders the role of interest deductibility for internal debt financing of multinational corporations (MNCs). We provide quasi-experimental evidence using restrictions on interest deductibility through thin-capitalization rules. Explicitly distinguishing between firms subject to a binding restriction and unrestricted firms, a panel data sample selection model is used to explore the tax sensitivity of the capital structure of foreign subsidiaries of MNCs. Our results confirm that the tax incentive for using internal loans is effectively removed for restricted subsidiaries. While internal debt financing of unrestricted subsidiaries positively responds to taxes, the effects are relatively small.