Local fiscal policies and their impact on the number and spatial distribution of new firms

Nadine Riedel,Martin Simmler,Christian Wittrock

doi:10.1016/j.regsciurbeco.2020.103525

Abstract

We examine the effect of local business taxation and local public good and service (PIGS) provision on the number and spatial distribution of new firms. Testing ground is Germany and we rely on the universe of firm foundations between 1998 and 2006. Methodologically, we estimate fixed effects poisson models coupled with a control function approach. The results suggest that a 1%-decrease in the business tax rate (the PIGS capital stock) raises (lowers) the number of new firms in the policy-changing jurisdiction by 4.6% (0.8%). Business tax reductions, moreover, strongly reduce the number of firm foundations in neighboring municipalities, implying that the aggregate number of new firms remains unchanged; while PIGS provision, on average, does not impact the number of firms in adjacent jurisdictions, negative effects emerge for subsets of PIGS and firms.

Highlights

Fostering the emergence of new businesses is a key concern for cities and municipalities around the globe (e.g. U.S Chamber of Commerce Foundation (2016), Forbes (2017))
The results suggest that a 1%-decrease in the business tax rate raises the number of new rms in the policychanging jurisdiction by 4.6% (0.8%)
The aim of this paper is to empirically identify the causal eect of scal policies, namely local business taxation and the provision of local public goods and services (PIGS), on rm foundation rates

Summary

Introduction

Fostering the emergence of new businesses is a key concern for cities and municipalities around the globe (e.g. U.S Chamber of Commerce Foundation (2016), Forbes (2017)). The aim of this paper is to empirically identify the causal eect of scal policies, namely local business taxation and the provision of local public goods and services (PIGS), on rm foundation rates. The model predicts that lower local business taxes raise the number of rm foundations in the policy-changing jurisdiction as more businesses enter the market and interjurisdictionally mobile new rms are attracted from the neighbouring locality. The latter eect implies that local business taxation gives rise to a beggar-thy-neighbour externality on the neighboring jurisdiction. Local PIGS provision is, predicted to have an ambiguous eect on the number of new rms in both, the PIGS-providing municipality and the neighboring jurisdiction. The level of sub-national tax autonomy signicantly varies across countries (with sub-national governments in some countries having no tax instruments at hand at all)

Objectives

Results

Conclusion