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How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany

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  • Sascha O. Becker
  • Peter Egger
  • Valeria Merlo

Abstract

Most existing empirical evidence on the impact of profit taxation on multinational firm activity is based on cross-country data. One major drawback of such data is that countries differ not only with regard to taxes but along other dimensions which might be hard to capture by means of observable characteristics. We compile a database of more than 11,000 municipalities in Germany to analyze the sensitivity of the location decisions of foreign MNEs with respect to business tax rates which are levied directly by the municipalities. Using count data models suited for cross-sectional and panel data, we find that higher business tax rates have a negative effect on the number of foreign MNE headquarters, after controlling for other determinants of firm location decisions. On average, a one-percent reduction of the municipal business tax rate (equivalent to a decline by about 0.14 percentage points) leads to an increase in the number of headquarters of foreign MNEs by about 0.05. Hence, the average municipality needs to reduce its business tax rate by 20% to attract one foreign MNE.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2517.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2517

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Keywords: multinational firms; profit taxation; regional public finance; count data;

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References

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Citations

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Cited by:
  1. Egger, Peter & Fahn, Matthias & Merlo, Valeria & Wamser, Georg, 2014. "On the genesis of multinational foreign affiliate networks," Munich Reprints in Economics, University of Munich, Department of Economics 20554, University of Munich, Department of Economics.
  2. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Working Papers on Fiscal Federalism 13, OECD Publishing.
  3. Hyun-Ju Koh & Nadine Riedel, 2010. "Do Governments Tax Agglomeration Rents?," Working Papers, Oxford University Centre for Business Taxation 1004, Oxford University Centre for Business Taxation.
  4. Fahn, Matthias, 2011. "Three Essays on Commitment and Information Problems," Munich Dissertations in Economics, University of Munich, Department of Economics 13750, University of Munich, Department of Economics.
  5. Janeba, Eckhard & Osterloh, Steffen, 2012. "Tax and the city: A theory of local tax competition and evidence for Germany," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 12-005, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Andrea Gauselmann & Philipp Marek & J. P. Angenendt, 2011. "MNE’s Regional Location Choice - A Comparative Perspective on East Germany, the Czech Republic and Poland," IWH Discussion Papers, Halle Institute for Economic Research 8, Halle Institute for Economic Research.
  7. Peter Egger & Valeria Merlo & Georg Wamser, 2014. "Unobserved Tax Avoidance and the Tax Elasticity of FDI," CESifo Working Paper Series 4921, CESifo Group Munich.

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