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

Abstract

Recent theoretical work in economic geography has shown that agglomeration forces can mitigate ‘race‐to‐the‐bottom’ tax competition, by partly or fully offsetting firms’ sensitivity to tax differentials. We test this proposition using data on firm births across Swiss municipalities. We find that corporate taxes deter firm births less in more spatially concentrated sectors. Firms in sectors with an agglomeration intensity in the top quintile are less than half as responsive to differences in corporate tax burdens as firms in sectors with an agglomeration intensity in the bottom quintile. Hence, agglomeration economies do appear to attenuate the impact of tax differentials on firms’ location choices.

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