How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany

Sascha Becker, Peter Egger, Valeria Merlo and Sascha O. Becker
Authors registered in the RePEc Author Service: Sascha O. Becker

No 2517, CESifo Working Paper Series from CESifo

Abstract: Most existing empirical evidence on the impact of profit taxation on multinational firm activity is based on cross-country data. One major drawback of such data is that countries differ not only with regard to taxes but along 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 the location decisions of foreign MNEs with respect to business tax rates which are levied directly by the municipalities. Using count data models suited for cross-sectional and panel data, we find that higher business tax rates have a negative effect on the number of foreign MNE headquarters, after controlling for other determinants of firm location decisions. On average, 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 headquarters of foreign MNEs by about 0.05. Hence, the average municipality needs to reduce its business tax rate by 20% to attract one foreign MNE.

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: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany (2008)
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