How low business tax rates attract MNE activity: Municipality-level evidence from Germany

Sascha Becker, Peter Egger and Valeria Merlo

Journal of Public Economics, 2012, vol. 96, issue 9-10, 698-711

Abstract: Most existing empirical evidences on the impact of profit taxation on multinational firm activity are based on cross-country data. One major drawback of such data is that countries differ not only with regard to taxes but also with 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 location decisions of foreign MNEs in Germany with respect to business tax rates which are levied directly by the municipalities. We find that higher business tax rates have a negative effect on three alternative measures of MNE activity, after controlling for other determinants of firm location decisions: the number of foreign MNEs, MNE employment, and MNE fixed assets. Our results suggest that tax competition among regional entities for foreign investors is a game of a few. In cross-section instrumental-variable regressions, 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 legally independent foreign-owned firms by about 0.45. The average municipality would have to reduce its business tax rate by about 2.2 percentage points (or 15%) from its average level to attract one foreign MNE. Hence, municipalities need to be attractive in other dimensions to be able to use tax instruments to attract foreign firms at the margin.

Keywords: Multinational firms; Profit taxation; Regional public finance; Count data (search for similar items in EconPapers)
JEL-codes: F23 H25 H32 R10 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:96:y:2012:i:9:p:698-711

DOI: 10.1016/j.jpubeco.2012.05.006

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