Building Fiscal Capacity (FISCAP)

• Applicants: Professorin Dr. Nadja Dwenger; Professorin Dr. Julia Fleischer; Professorin Dr. Anna Gumpert
• Subject Area: Economic Policy, Applied Economics
• Term: from 2020 to 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 437561281

Fiscal capacity—the ability of governments to raise revenue from broad tax bases—is a crucial determinant of economic growth and democratic outcomes. A well-functioning fiscal administration is a key element of fiscal capacity. However, surprisingly little is known about how an efficient fiscal administration can be built in places where it does not yet exist and about the consequences of capacity building.The project “Building Fiscal Capacity” (FISCAP) improves our understanding of capacity building in the fiscal administration. The FISCAP project studies empirically the measures taken to build the fiscal administration in the territory of the former German Democratic Republic after the German reunification and evaluates their impact in the short and long run. Our team brings together expertise from the fields of public finance, public administration and organizational economics. Our research project consists of four work packages (WPs). In WP 1, we will create a novel data set based on preliminary work in which we have collected unique detailed information on the elements of administrative aid provided by West German tax offices to East German tax offices after reunification: on-the-job-training of East German personnel, secondments of West German officials as well as permanent transfers. We have also assembled indicators of tax office capacity. We will digitize the data and complement it with novel measures of tax office organization that we will construct as part of the project. We will make the data set available to other researchers after completion of our project.In WP 2, we will evaluate the effectiveness of the different strategies for capacity building in the fiscal administration. Administrative aid is usually tailored to the needs of the receiving tax office and thus endogenous. We will exploit the unique historical setting after German reunification for identification: East German states were partnered with West German states; the administrative aid depended on the financial and personnel situation of the West German partner, which was exogenous to the East German tax office. We will thus provide the first causal empirical evidence about fiscal capacity building at the tax office level.In WP 3, we will study the ramifications of capacity building for local economic and democratic outcomes. We will provide the first empirical assessment at the local level, thus complementing the literature at the country level.In WP 4, we will assess the (optimal) organization of the fiscal administration. We will document the diffusion dynamics of organizational practices in the fiscal administration between West and East Germany through fiscal capacity building. We will exploit the repercussions of the administrative aid on the personnel situation in West Germany to empirically investigate how to optimally structure tax office organization for incentive provision.

• DFG Programme: Research Grants