In a world with heterogeneous tax systems, profit maximizing firms which try to minimize their overall tax burdens, have an economic incentive to strategically shift their wealth and income between regions. Some regions cater to these firms by offering very low tax rates, trying to attract the foreign tax base to their jurisdiction. These regions are widely known as tax havens. Academic studies so far have focused on investigating the size and fiscal consequences of international tax havens. In many countries, e.g. Germany and the USA, corporate taxes are in part set at the sub-national, i.e. state or municipal, level. I argue that, similar to international tax havens, sub-national governments have an incentive to attract tax bases to their jurisdiction by choosing very low corporate tax rates. I label these regions local tax havens. So far there is no systematic information on the occurrence and size of local tax havens. In this project I will investigate local tax havens in Germany. I draw on administrative data on the municipal and establishment level to estimate the fiscal and economic effects of local tax havens in Germany.

In this paper, we investigate the effect of import and export shocks on German municipalities’ local business tax (LBT) bases and fiscal outcomes for the period from 1992 to 2012. Import shocks have a detrimental effect on local outcomes, while export shocks increase LBT bases as well as municipal revenues and expenditures. The effect on expenditure patterns depends on municipalities’ initial fiscal and economic conditions. Results are stronger in the 2002 to 2012 period than in the 1992 to 2002 period. We find that our results are mostly driven by trade between municipalities located in West Germany and Eastern Europe.

What are the local economic impacts of foreign troop deployments? To answer this question, we exploit variation from the historical large-scale U.S. troop withdrawal from Germany at the end of the Cold War for identification. Administrative data by the U.S. Department of Defense enables the precise quantification of the shock at the municipal level. We find negative effects on local labor markets, which transmit to municipal finances. Revenues go down, which municipalities counter by decreasing their expenditures while increasing property tax multipliers. Long time-series enable us to show in a dynamic DID setup that these negative effects persist until today and often even increase over time. Persistently higher intergovernmental transfers allocated to affected municipalities alleviate the negative fiscal impacts.