Local business profits respond to local business tax (LBT) rates that vary
across municipalities. We estimate that a one percent increase in the LBT rate
decreases the LBT base by 0.45 percent, based on the universe of German LBT
return files, which include corporations and unincorporated businesses.
However, the fiscal equalization scheme largely compensates municipalities for
the loss in the LBT base when they increase the LBT rate. Our estimates
suggest that using tax revenue data instead of tax return data, as commonly
done in the literature, results in a significant bias of the elasticity away