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



in many ways rather than only in profit taxes, most importantly with regard
to institutional characteristics that are hard to measure. Omission of relevant
institutional determinants of MNE activity is likely in cross-country studies
and may bias empirical estimates of the sensitivity of MNE activity with
respect to taxation and other variables. Both problems can be avoided when
considering firm location decisions at the sub-national level. Of course, a
prerequisite for this is the existence of sub-national jurisdictions which differ
with regard to profit tax rates.

There is a small literature on the nexus between firm births (national and
foreign firms) and taxation which focuses on location decisions across regions
within a country. For instance, Slemrod (1990; analyzing direct investments
in 50 U.S. states by home country) Papke (1991; exploiting information across
22 U.S. states), Hines (1996; analyzing foreign direct investment in 50 U.S.
states by home country), List (2001; using 58 Californian counties), and
BrUhlhart, Jametti, and Schmidheiny (2007; focusing on 213 large Swiss
municipalities) belong here. Of these studies, only Slemrod (1990), Hines
(1996), and List (2001) focus on the location decisions of
foreign firms (i.e.,
foreign MNEs) explicitly and, hence, ask questions which are comparable to
ours. List (2001) analyzes the impact of the per-capita property tax rate on
MNEs rather than a profit tax burden which is directly levied on businesses.
Slemrod (1990) and Hines (1996) are interested not only in the impact of
state-level corporate tax rates in the U.S. but also at the role of the system of
double taxation relieve in the recipient countries. Apart from the differences
in the research questions posed in this paper as compared to the papers just
mentioned, the number of jurisdictions (i.e., the number of host locations)
which we can analyze is larger than in previous work by more than one order
of magnitude.

We compile a large data-set on local business tax rates1 and other data
at the municipality level. Our data covers more than 11
, 000 German mu-
nicipalities over the period 2001 to 2005. We link this data-set with data
on the location of the German headquarters of foreign MNEs.
2 The set of

1 These business tax rates are set directly by municipalities, and they apply to the
profits of all firms in a jurisdiction. For exceptions, see §3 of the German business tax law
(Gewerbesteuergesetz GewStG).

2The work of Slemrod (1990) and Hines (1996) blends home country and host juris-
diction issues with corporate taxation. Unlike them, we do not distinguish foreign MNEs
according to their country of origin. We prefer to focus on the responsiveness of MNE
location (from anywhere) to host jurisdiction business tax rates for two reasons. First, we



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