How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany

38 Pages Posted: 14 Jan 2009

See all articles by Sascha O. Becker

Sascha O. Becker

Monash University - Department of Economics; University of Warwick

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Valeria Merlo

University of Tuebingen

Date Written: January 1, 2009

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.

Keywords: multinational firms, profit taxation, regional public finance, count data

JEL Classification: F23, H25, H32, R10

Suggested Citation

Becker, Sascha O. and Egger, Peter H. and Merlo, Valeria, How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany (January 1, 2009). Available at SSRN: https://ssrn.com/abstract=1327685 or http://dx.doi.org/10.2139/ssrn.1327685

Sascha O. Becker (Contact Author)

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

Poschingerstr. 5
Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

HOME PAGE: http://www.cesifo-group.de/portal/page?_pageid=36,425628&_dad=portal&_schema=PORTAL

Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

Valeria Merlo

University of Tuebingen ( email )

Department of Economics
Nauklerstr. 47
Tübingen, 72074
Germany

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