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

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  • Becker, Sascha
  • Egger, Peter H
  • Merlo, Valeria

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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Bibliographic Info

Paper provided by University of Stirling, Division of Economics in its series Stirling Economics Discussion Papers with number 2008-30.

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Date of creation: Dec 2008
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Handle: RePEc:stl:stledp:2008-30

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Postal: Division of Economics, University of Stirling, Stirling, Scotland FK9 4LA
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Fax: +44 (0)1786 467469
Web page: http://www.econ.stir.ac.uk/
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Keywords: Count data; Regional public finance; Profit taxation; Multinational fi rms;

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Citations

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Cited by:
  1. Janeba, Eckhard & Osterloh, Steffen, 2013. "Tax and the city: A theory of local tax competition and evidence for Germany," ZEW Discussion Papers 12-005 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Hyun-Ju Koh & Nadine Riedel, 2010. "Do Governments Tax Agglomeration Rents?," CESifo Working Paper Series 2976, CESifo Group Munich.
  3. Egger, Peter & Fahn, Matthias & Merlo, Valeria & Wamser, Georg, 2011. "On the Genesis of Multinational Foreign Affiliate Networks," CEPR Discussion Papers 8536, C.E.P.R. Discussion Papers.
  4. Fahn, Matthias, 2011. "Three Essays on Commitment and Information Problems," Munich Dissertations in Economics 13750, University of Munich, Department of Economics.
  5. 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 8, Halle Institute for Economic Research.
  6. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Economics Department Working Papers 872, OECD Publishing.

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