Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/39028 
Year of Publication: 
2010
Series/Report no.: 
CESifo Working Paper No. 2976
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Using the German local business tax as a testing ground, we empirically investigate the impact of firm agglomeration on municipal tax setting behavior. The analysis exploits a rich data source on the population of German firms to construct detailed measures for the communities' agglomeration characteristics. The findings indicate that urbanization and localization economies exert a positive impact on the jurisdictional tax rate choice which confirms predictions of the theoretical New Economic Geography (NEG) literature. Further analysis suggests a qualification of the NEG argument by showing that a municipality's potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.
Subjects: 
agglomeration rents
corporate taxation
regional differentiation
JEL: 
H73
R12
Document Type: 
Working Paper
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