Firm mobility and jurisdictions' tax rate choices: Evidence from immobile firm entry

Keywords Corporate taxation; Firm mobility; Tax competition Highlights * When average firm mobility falls, local governments set higher tax rates. * We confirm this using the rapid growth of wind turbines in Germany for identification. * After immobile firm entry, municipalities increased corporate taxes by up to 24%. Abstract Capital mobility is one of the key determinants of corporate tax rates. We first show theoretically that governments will set higher tax rates on firm profits after an immobile firm has entered. We then test this prediction in a well-identified setting, using the rapid growth of wind power plants (a very immobile industry) and the large variation in local business taxes across Germany for identification. We confirm that municipalities increase corporate tax rates by up to 24% after immobile firm entry. The effect is stronger when immobile firms make up a larger share of the overall tax base. Author Affiliation: (a) KU Eichstätt-Ingolstadt, CESifo, Germany and WU Vienna, Austria (b) University of Oxford, United Kingdom and DIW, Germany * Corresponding author. Article History: Received 19 March 2019; Revised 13 April 2021; Accepted 29 September 2021 (footnote)[white star] We thank Juan Carlos Suárez Serrato (the editor), two anonymous reviewers, Johannes Becker, Steve Bond, Andreas Haufler, Ben Lockwood, Rainer Niemann (discussant), Georg Schaur, Kurt Schmidheiny (discussant), Johannes Voget (discussant) and participants at conferences by the German Economic Association and the Royal Economic Society, the MaTax conference, the summer symposium of the Oxford Centre for Business Taxation, the Norwegian-German Seminar for Public Economics, the CESifo Venice Summer Institute, and at seminars at the Universities of Bochum, Dublin, Linz, Munich, Oslo, Oxford and Tübingen for very helpful comments. Work on this paper was started when Dominika Langenmayr was visiting Oxford University Centre for Business Taxation, she is grateful for their hospitality. We gratefully acknowledge financial support from the German Research Foundation (Langenmayr: LA 3565/1--1, Simmler: SI 2050/1--1). A longer version of the paper was previously circulated under the title 'Why the Current Tax Rate Tells You Little: Competing for Mobile and Immobile Firms'. Byline: Dominika Langenmayr [dominika.langenmayr@ku.de] (a,*), Martin Simmler [martin.simmler@sbs.ox.ac.uk] (b)