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



dogenous or not, the impact of business tax rates is of reasonable magnitude.
The average German municipality was not able to attract any foreign head-
quarters at all over the years covered by our data. Such a municipality would
have to lower its business tax rate by about twenty percent (or 2.8 percentage
points) to lure a foreign MNE into its jurisdiction, according to our results.
It is very likely that the associated gains in taxes collected from the foreign
MNE would be lower than the losses the average municipality encountered
from foregone business tax revenues collected from national enterprises.

Obviously, most municipalities do not find this attractive, since foreign
capital is not the only important tax base to consider. However, larger mu-
nicipalities with an abundant workforce, especially of skilled workers, may
attract foreign MNE headquarters by much smaller changes in their tax rates.
Implicitly, these results suggest that municipalities with generally favorable
environments for firm location should be able to use their tax rates more
successfully to attract foreign MNEs than those with less favorable environ-
ments.

21



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