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Do governments tax agglomeration rents?

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  • Koh, Hyun-Ju
  • Riedel, Nadine
  • Böhm, Tobias

Abstract

Empirical evidence suggests that firms receive rents from locating in economic agglomerations and industry clusters. Using the German local business tax as a testing ground, we empirically investigate whether these agglomeration rents are taxable for local governments. The analysis exploits a rich data source on the population of German plants to construct measures for the communities’ agglomeration characteristics. The findings indicate that economic agglomerations and industry clusters exert a positive impact on the jurisdictional tax rate choice. Further analysis moreover suggests that a municipality’s potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 75 (2013)
Issue (Month): C ()
Pages: 92-106

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Handle: RePEc:eee:juecon:v:75:y:2013:i:c:p:92-106

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Web page: http://www.elsevier.com/locate/inca/622905

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Keywords: Agglomeration rents; Corporate taxation; Regional differentiation;

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Citations

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Cited by:
  1. Hyun-Ju Koh & Nadine Riedel, 2010. "Do Governments Tax Agglomeration Rents?," CESifo Working Paper Series 2976, CESifo Group Munich.
  2. Gaigné, Carl & Riou, Stéphane & Thisse, Jacques-François, 2013. "How to make the metropolitan area work? Neither big government, nor laissez-faire," CEPR Discussion Papers 9499, C.E.P.R. Discussion Papers.
  3. Luthi, Eva & Schmidheiny, Kurt, 2011. "The Effect of Agglomeration Size on Local Taxes," CEPR Discussion Papers 8344, C.E.P.R. Discussion Papers.

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