The effect of agglomeration size on local taxes

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Effect of Agglomeration Size on Local Taxes Abstract Standard tax competition models predict a 'race-to-the-bottom' of corporate tax rates when firms are mobile. Recent theoretical literature has qualified this view by offering a theoretical explanation why this extreme prediction need not occur: central regions with large clusters of economic activity are able to set positive tax rates without fearing to lose firms to peripheral regions as the firms would forego 'rents' from agglomeration economies. In this paper, we study whether local policy makers effectively tax such agglomeration rents. We test this with panel data from Swiss municipalities between 1985 and 2005. We find that large urban areas set indeed higher tax rates than small ones. This is consistent with the theoretical prediction. Within urban areas, however, municipal tax rates are unrelated to the size of economic activity in and around municipalities while they are positively related to the size of the political jurisdiction. We see this result as evidence that the standard tax competition model for asymmetric jurisdictions is at work in the competition of municipalities within an urban area. Both results are robust to controlling for reverse causality by using instrumental variables. Controlling for fixed effects in a 20 year panel is non-informative and neither supports nor contradicts these findings. As a robustness check we introduce an new measure of cluster intensity which considers the varying intensities in agglomeration economies across sectors. Terms of use: Documents inJEL-Code: R300, H320.

Agglomeration economies, taxable rents and government capture: evidence from a place-based policy

“…Buettner (2001) finds that more populous German municipalities set higher local business tax rates, and Charlot and Paty (2006) find that French municipalities with greater market potential do likewise. 7 More recently, the reverse-causation problem has been addressed by instrumenting the right-hand-side agglomeration measure with agglomeration measured at a date prior to the introduction of the tax that represents the left-hand-side variable (Jofre-Monseny, 2013; Koh, Riedel and Böhm, 2013;and Luthi and Schmidheiny, 2014).…”

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

“…8 8 In a related strand of recent research, Charlot and Paty (2007), Jofre‐Monseny and Solé‐Ollé (2010, 2012), Koh and Riedel (2010), Jofre‐Monseny (forthcoming) and Lüthi and Schmidheiny (2011)) have found that local tax rates are positively correlated with measures of local agglomeration. …”

Fiscal Decentralization - A Survey of the Empirical Literature

“…Tax competition is constrained by agglomeration effects, since localities in economic clusters will be able to exert higher taxes compared to localities in the periphery. Luthi and Schmidheiny (2011) provide evidence regarding agglomeration effects on taxes in Swiss municipalities. They report that tax competition between regions is weak, but tax competition within regions is much stronger.…”