REGIONAL FISCAL-POLICY WITH ALTERNATIVE BUSINESS TAXES

Two basic revenue sources of local jurisdictions in Germany are local business taxes and grants provided by higher-level governments. The paper analyzes how the provision of local public goods is affected by altering unconditional grants on part of a higher governmental level. Provided that the local jurisdictions can use a cash-flow-tax as a local business tax, both revenue sources are completely interchangeable. The supply of local public goods does not vary. If the local business tax is a "Wertschopfungssteuer" or a "Gewerbesteuer", increased unconditional grants have a crucial advantage from the viewpoint of a single local jurisdiction: a neutral revenue source substitutes a distorting one. Hence, the provision of local public goods is encouraged.