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Why the Current Tax Rate Tells You Little: Competing For Mobile and Immobile Firms

Listed author(s):
  • Langenmayr, Dominika Irma
  • Martin, Simmler

This paper analyses if, and to which extent, firms anticipate future tax rate changes. The weight of future tax rates in firms' location decisions may explain differences in the sensitivity of firms' location decision to current tax rates. Firms with high relocation costs, for example, are more sensitive to expected future changes in the tax rate, as they find it more costly to react to tax rate increases later. Governments react to this behavior by increasing the corporate tax rate if the share of firms with high relocation costs is high. We first derive these effects in a simple model and then test for them empirically, using the evolution of a new and highly immobile industry (wind turbines) for identification.

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File URL: https://www.econstor.eu/bitstream/10419/145568/1/VfS_2016_pid_6421.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2016 (Augsburg): Demographic Change with number 145568.

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Date of creation: 2016
Handle: RePEc:zbw:vfsc16:145568
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Paulo Guimarães & Octávio Figueirdo & Douglas Woodward, 2003. "A Tractable Approach to the Firm Location Decision Problem," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 201-204, February.
  2. Koh, Hyun-Ju & Riedel, Nadine & Böhm, Tobias, 2013. "Do governments tax agglomeration rents?," Journal of Urban Economics, Elsevier, vol. 75(C), pages 92-106.
  3. Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April.
  4. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate tax elasticities: a reader's guide to empirical findings," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 680-697, winter.
  5. Borck, Rainald & Pfluger, Michael, 2006. "Agglomeration and tax competition," European Economic Review, Elsevier, vol. 50(3), pages 647-668, April.
  6. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
  7. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers CIE 21, Paderborn University, CIE Center for International Economics.
  8. Lars P. Feld & Jost H. Heckemeyer, 2011. "Fdi And Taxation: A Meta‐Study," Journal of Economic Surveys, Wiley Blackwell, vol. 25(2), pages 233-272, 04.
  9. Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2012. "Do agglomeration economies reduce the sensitivity of firm location to tax differentials?," Economic Journal, Royal Economic Society, vol. 122(563), pages 1069-1093, 09.
  10. Zodrow, George R., 2010. "Capital Mobility and Capital Tax Competition," National Tax Journal, National Tax Association, vol. 63(4), pages 865-901, December.
  11. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
  12. Simmler, Martin & Haan, Peter, 2015. "On the incidence of renewable energy subsidies into land prices - Evidence from Germany," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112950, Verein für Socialpolitik / German Economic Association.
  13. Jordi Jofre-Monseny, 2013. "Is agglomeration taxable?," Journal of Economic Geography, Oxford University Press, vol. 13(1), pages 177-201, January.
  14. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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