Effective labor taxation and the international location of headquarters

Abstract

Profit taxes are widely acknowledged to influence the location of firms' headquarters. This paper sheds light on the role of aspects of labor taxation for the international location of headquarters. While profit taxes can be avoided in various ways, it is much harder for firms to manipulate the firm-specific labor tax base so that labor taxes may be relatively important for firm location. We construct a unique data set of effective labor taxes in 120 countries and use data on the location of 35,206 firms to analyze the impact of labor income tax rates, the progressivity of the income tax schedule, and social security contributions on firms' decisions where to locate their headquarters. The findings suggest that both a higher progressivity of the tax system and higher (employeeand employer -borne) social security contributions negatively influence a country's attractiveness for headquarters location. Hence, a one percentage point increase in these payroll taxes, reduces the probability of a country to attract headquarters by 6.1 percent. The results prove robust in various empirical model specifications and subsets of the data. JEL-classification: H24; C25

Where do MNEs locate their headquarters? at home!

“…We expect that inertial forces (and associated risks) are highest for operational HQ relocations, whereas changes of registration and listing locations may involve lower mobility barriers. Coeurderoy and Verbeke (, this issue) emphasize general ‘institutional quality,’ whereas earlier studies (Laamanen et al, ; Voget, ; Egger et al, ) emphasize specific aspects of the tax legislation. Theoretical considerations suggest that Coeurderoy and Verbeke's (, this issue) conclusion may be more relevant with respect to operational headquarters, whereas tax legislation is more important for legal domicile.…”

“…We would hypothesize, for example, that a legal domicile is strongly related to corporate tax codes, whereas a stock market listing is driven by financial market liquidity and corporate governance rules. Studies such as Egger et al (); Laamanen, Simula, and Torstila (), and Voget () that operationalize HQ location by legal domicile find tax issues to be a major driver of headquarters relocations. However, they are actually capturing a different phenomenon than relocation of HQ as the operational center of the company.…”

“…For the theory of the MNE (Dunning, 1993;Rugman and Verbeke, 1992) and for strategic management scholarship (Birkinshaw et al, 2006), the relevant definition focuses on the location of the operational unit called 'HQ' because it reflects the location of resources and decision-making processes. In contrast, scholars of taxation or accounting may be interested in the legal residency which, to a larger extent, is driven by tax optimization considerations (Desai and Hines, 2002;Egger, Radulescu, and Strecker, 2013;Voget, 2011).…”

The Nordic model – challenged but capable of reform

“…There is never-theless some evidence that taxation indeed can impact on the location choices of highly skilled individuals . Interestingly, some evidence has emerged that also the location of corporate headquarters is affected by labour taxation (Egger et al 2013). This can be rationalised precisely by the aforementioned importance of key personnel for the production process.…”

Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms

“… These results can also be seen to fit with a new but growing body of literature on the effects of personal taxes on corporate choices including location (e.g., Egger et al ., ). …”