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

Marius Brülhart, Mario Jametti () and Kurt Schmidheiny

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: 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.

Keywords: firm location; agglomeration economies; local taxation; count models; Switzerland (search for similar items in EconPapers)
JEL-codes: H32 R3 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-12
New Economics Papers: this item is included in nep-geo, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published in The Economic Journal, 122(563), September 2012, pp. 1069-1093

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Related works:
Journal Article: Do agglomeration economies reduce the sensitivity of firm location to tax differentials? (2012)
Working Paper: Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials? (2007)
Working Paper: Do agglomeration economies reduce the sensitivity of firm location to tax differentials? (2007)
Working Paper: Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials? (2007)
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