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Do Governments Tax Agglomeration Rents?

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  • Hyun-Ju Koh

    ()
    (University of Munich,)

  • Nadine Riedel

    ()
    (Oxford University Centre for Business Taxation, CESifo Munich)

Abstract

Using the German local business tax as a testing ground, we empirically investigate the impact of firm agglomeration on municipal tax setting behavior. The analysis exploits a rich data source on the population of German firms to construct detailed measures for the communities' agglomeration characteristics. The findings indicate that urbanization and localization economies exert a positive impact on the jurisdictional tax rate choice which confirms predictions of the theoretical New Economic Geography (NEG) literature. Further analysis suggests a qualification of the NEG argument by showing 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

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1004.

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Date of creation: 2010
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Handle: RePEc:btx:wpaper:1004

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Keywords: Agglomeration Rents; Corporate Taxation; Regional Differentiation;

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Cited by:
  1. Carl Gaigné & Stéphane Riou & Jacques-François Thisse, 2013. "How to make the metropolitan area work ? Neither big government, nor laissez-faire," Working Papers halshs-00816405, HAL.
  2. Eva Luthi & Kurt Schmidheiny, 2011. "The Effect of Agglomeration Size on Local Taxes," CESifo Working Paper Series 3426, CESifo Group Munich.
  3. Hyun-Ju Koh & Nadine Riedel, 2010. "Do governments tax agglomeration rents?," Working Papers 2010/21, Institut d'Economia de Barcelona (IEB).

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