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Appears in Collections:Economics Working Papers
Peer Review Status: Unrefereed
Title: How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany
Authors: Becker, Sascha
Egger, Peter H
Merlo, Valeria
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Citation: Becker S, Egger PH & Merlo V (2008) How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany. Stirling Economics Discussion Paper, 2008-30.
Keywords: Multinational firms
Profit taxation
Regional public finance
Count data
JEL Code(s): F23
Issue Date: Dec-2008
Series/Report no.: Stirling Economics Discussion Paper, 2008-30
Abstract: Most existing empirical evidence on the impact of profit taxation on multinational firm activity is based on cross-country data. One major drawback of such data is that countries differ not only with regard to taxes but along other dimensions which might be hard to capture by means of observable characteristics. We compile a database of more than 11,000 municipalities in Germany to analyze the sensitivity of the location decisions of foreign MNEs with respect to business tax rates which are levied directly by the municipalities. Using count data models suited for cross-sectional and panel data, we find that higher business tax rates have a negative effect on the number of foreign MNE headquarters, after controlling for other determinants of firm location decisions. On average, a one-percent reduction of the municipal business tax rate (equivalent to a decline by about 0.14 percentage points) leads to an increase in the number of headquarters of foreign MNEs by about 0.05. Hence, the average municipality needs to reduce its business tax rate by 20% to attract one foreign MNE.
Type: Working or Discussion Paper
Affiliation: Economics
Ifo Institute, Germany
Ifo Institute, Germany

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