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Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?

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Author Info
Brülhart, Marius
Jametti, Mario
Schmidheiny, Kurt

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Abstract

Low corporate taxes can help attract new firms. This is the main mechanism underpinning the standard 'race-to-the-bottom' view of tax competition. A recent theoretical literature has qualified this view by formalizing the argument that agglomeration forces can reduce firms' sensitivity to tax differentials across locations. We test this proposition using data on firm startups across Swiss municipalities. We find that, on average, high corporate income taxes do deter new firms, but that this relationship is significantly weaker in the most spatially concentrated sectors. Location choices of firms in sectors with an agglomeration intensity at the twentieth percentile of the sample distribution are estimated to be twice as responsive to a given difference in local corporate tax burdens as firms in sectors with an agglomeration intensity at the eightieth percentile. Hence, our analysis confirms the theoretical prediction: agglomeration economies can neutralize the impact of tax differentials on firms' location choices.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6606.

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Date of creation: Dec 2007
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Handle: RePEc:cpr:ceprdp:6606

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Related research
Keywords: agglomeration economies; count models; firm location; local taxation; Switzerland;

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Find related papers by JEL classification:
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
R3 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location

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  3. Jordi Jofre-Monseny & Albert Solé-Ollé, 2007. "Tax differentials and agglomeration economies in intraregional firm location," Working Papers 2007/2, Institut d'Economia de Barcelona (IEB). [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lars P. Feld & Jost Henrich Heckemeyer, 2009. "FDI and Taxation: A Meta-Study," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Nelly Exbrayat, 2008. "The Impact of Trade Integration and Agglomeration Economies on Tax Interactions : Evidence from OECD Countries," Post-Print hal-00270067_v1, HAL. [Downloadable!]
  3. Jordi Jofre-Monseny & Albert Solé-Ollé, 2008. "Which Communities should be afraid of Mobility? The Effects of Agglomeration Economies on the Sensitivity of Firm Location to Local Taxes," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Sascha O. Becker & Peter Egger & Valeria Merlo, 2009. "How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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