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Do governments tax agglomeration rents?

  • Koh, Hyun-Ju
  • Riedel, Nadine
  • Böhm, Tobias

Empirical evidence suggests that firms receive rents from locating in economic agglomerations and industry clusters. Using the German local business tax as a testing ground, we empirically investigate whether these agglomeration rents are taxable for local governments. The analysis exploits a rich data source on the population of German plants to construct measures for the communities’ agglomeration characteristics. The findings indicate that economic agglomerations and industry clusters exert a positive impact on the jurisdictional tax rate choice. Further analysis moreover suggests that a municipality’s potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.

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Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 75 (2013)
Issue (Month): C ()
Pages: 92-106

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Handle: RePEc:eee:juecon:v:75:y:2013:i:c:p:92-106
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622905

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