Working Paper: CEPR ID: DP6606
Authors: Marius Brülhart; Mario Jametti; Kurt Schmidheiny
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: agglomeration economies; count models; firm location; local taxation; Switzerland
JEL Codes: H32; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High corporate taxes (H29) | Deter new firms from entering Swiss municipalities (L11) |
| High corporate taxes (H29) | Negative impact on firm births (L26) |
| Agglomeration intensity (R12) | Weaker negative relationship with high corporate taxes (H32) |
| High agglomeration (R11) | Diminishes importance of tax differentials (H29) |