We develop a market-level equilibrium model to show the theoretical relationship between the effective tax rate on marginal cost (ETRMC) and business location decisions. The ETRMC systematically aggregates the various taxes on firm inputs into a measure of the impact of taxes on marginal production costs. A three-dimensional panel investigation of manufacturing establishments in Canadian provinces indicates that the ETRMC is a statistically significant determinant of firm location decisions, with an elasticity of the number of establishments iwth respect to the ETRMC of about -0.30. We compare our findings with the results from including effective marginal tax rates on capital and on labour as separate regressors and we provide estimates using an alternative measure of tax burden given by the average effective tax rates (AETR).
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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number
2007-07.