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

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Author Info
Marius BRÜLHART
Mario JAMETTI
Kurt SCHMIDHEINY

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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 Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 07.13.

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Length: 35 pages
Date of creation: Dec 2007
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Handle: RePEc:lau:crdeep:07.13

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

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

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