Why the Current Tax Rate Tells You Little: Competing for Mobile and Immobile Firms

43 Pages Posted: 27 Feb 2018

See all articles by Dominika Langenmayr

Dominika Langenmayr

Catholic University of Eichstaett-Ingolstadt; CESifo (Center for Economic Studies and Ifo Institute)

Martin Simmler

German Institute for Economic Research (DIW Berlin)

Date Written: January 23, 2018

Abstract

Firms should use all available information to anticipate future tax rates. Firm mobility, as a key determinant of corporate tax rates, is one such source of information. We first show theoretically that a government sets a higher tax rates on firm profits if average firm mobility in its jurisdiction is low, and that the potential entry of immobile firms in the future deters firms from entering a jurisdiction today. We then test and confirm these predictions 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.

Keywords: corporate taxation, firm mobility, commitment, tax competition

JEL Classification: H250, H710, F210

Suggested Citation

Langenmayr, Dominika and Simmler, Martin, Why the Current Tax Rate Tells You Little: Competing for Mobile and Immobile Firms (January 23, 2018). CESifo Working Paper Series No. 6827. Available at SSRN: https://ssrn.com/abstract=3129980

Dominika Langenmayr (Contact Author)

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Martin Simmler

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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