The Aggregate Consequences of Local Capital Taxation

We study the repeal of France’s Taxe Professionnelle, a large and spatially dispersed local capital tax whose rates were set by nearly 35,000 municipalities. Combining administrative data with a dynamic spatial general equilibrium model disciplined by reduced-form estimates of firms’ investment responses, we find that the reform raises real income per worker by 5.1% in the long run and worker welfare by 2.6% in consumption-equivalent terms, accounting for transition dynamics. Counterfactuals isolating the level and spatial dispersion of taxes reveal that reducing the level, which triggers capital deepening, drives the bulk of income gains. Removing spatial dispersion alone reduces income per worker but raises welfare, as spatial frictions and compensating differentials redirect activity from productive locations toward high-amenity destinations.