By looking at the smallest regional unit (municipalities), aggregation bias is
ruled out.
German municipalities have autonomy in determining the local business
tax rate, while the tax base is defined by the federal tax law which applies
uniformly in all municipalities.13 Profit-shifting between plants in an at-
tempt to escape the local business tax is avoided by formula apportionment:
firm profits to be taxed are apportioned to each municipality according to
the share of payroll paid there.14 We expect headquarters to represent an
important share of total payroll, so that the local business tax rate is an
important determinant in the location decision of headquarters.
In Germany, there are over 12,000 municipalities. For 11,094 of these,
we have a panel data set of the dependent and explanatory variables over
the period 2001 to 2005 with at least two consecutive observations in the
sample period. For the cross-section in year 2005, we have data on 11,208
municipalities.15 Table 1 shows descriptive statistics of the municipal data
for 2005. In that year, only 1,674 municipalities - or 14% - hosted foreign
MNE headquarters.
- Table 1 -
Figure 1 shows a histogram of the number of MNE headquarters across
all municipalities in 2005. Whereas 86% of the municipalities did not host a
single MNE headquarters, six municipalities (Hamburg, Munich, Frankfurt,
Düsseldorf, Berlin and Cologne) hosted more than 200 each. Altogether, the
latter six municipalities hosted almost one third of all foreign headquarters
in Germany in that year. Figure 2 illustrates the geographical distribution
of MNE headquarters.
and a good infrastructure but unskilled labor in the other half of the country. Country
B, in contrast, might have both skilled labor and a good infrastructure in one half of the
country and neither skilled labor nor a good infrastructure in the other half of the country.
These sub-national differences might matter for aggregate outcomes, but are washed out
in national aggregates.
13There have been reforms about business tax law across the years. However, no such
change has been undertaken in the period we consider here (2001-2005).
14See the German business tax law, in particular, §29 GewStG (Gewerbesteuergesetz).
15The difference between the total number of more than 12,000 municipalities and the
smaller ones in the panel and cross-section accrues to lacking data on some of the explana-
tory variables for municipalities in the state of Mecklenburg-Vorpommern (except for the
seven Kreisfreie Stadte - i.e., larger cities - in that state: Greifswald, Neubrandenburg,
Rostock, Schwerin, Stralsund, and Wismar).