A Tax-Shaped Retail Landscape

Abstract

We investigate the impact that seemingly uniform business tax policies have on shaping the retail landscape. Using data about all retail establishments in the United States, we show that while retailers are more likely to open establishments in markets that experienced decreases in business state tax, these inferred effects are more pronounced for large chains as compared with small chains. Motivated by these empirical realities, we develop an entry model where firms are subject to taxes that impact their sunk costs of entry. A key insight from this model is that taxes can potentially amplify market dominance, such that retailers with preexisting advantages are disproportionately more responsive to the tax policies.

Keywords: Business Dynamism, Entrepreneurship, Firm Size, Market Power, Public Finance, Retail Diversity, Strategic Entry, Tax Incentives, Urban Policy and Revival, Place-Based Policies

JEL Classification: L00; L13; L52; L81; R00; H25