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

By Marius Brülhart, Mario Jametti, Kurt Schmidheiny. 2012

194 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/96e9a325fafa0e5bf8d2179d0c88e0e076ca5775

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

Citations in the corpus

FDI and Taxation: A Meta-Study (2011, unknown): “Overesch/Wamser (2008a) Papke (1991) Overesch/Wamser (2008b) Stöwhase (2005b) Buettner/Wamser (2008) Desai et al. (2004) Overesch/Wamser (2008a) Becker et al.”
Do Governments Tax Agglomeration Rents? (2013, background): “(2007), Brülhart et al. (2007) and Jofre-Monseny and Solé-Ollé (2008) on the attenuating effects of agglomeration economies on firms’ sensitivity to tax differentials.”
The mechanisms of agglomeration: Evidence from the effect of inter-industry relations on the location of new firms (2011, unknown): “Brülhart et al (2007) label these two observationally equivalent models as the ‘Footloose Startup’ and the ‘Latent Startup’ models.”
Place-Based Policies and Spatial Disparities across European Cities (2020, unknown): “This may be important if integration generates economic growth at the centre at the expense of peripheral regions (Puga 2002) or if wealthier areas can set higher taxes because firms’ desire to locate there reduces tax competition (Brülhart et al. 2012).”