Large and influential: Firm size and governments’ corporate tax rate choice

Abstract

Theory suggests that large firms are more likely to engage in lobbying behaviour and are geographically more mobile than smaller entities. Conditional on jurisdiction size, policy choices are thus predicted to depend on the shape of a jurisdiction's firm size distribution, with more business-oriented policies being enacted if jurisdictions host large firms. The paper empirically tests this prediction using local business taxation in Germany as a testing ground. Exploiting rich and exogenous variation in localities' firm size structures, we find evidence for an inverse relationship between the size of hosted entities and communities' local business tax choices. The effect is statistically significant and quantitatively relevant, suggesting that the rising importance of large businesses may trigger shifts towards a more business-friendly design of (tax) policies. JEL-Codes: H200, H700.

Downward Revision of Investment Decisions after Corporate Tax Hikes

“…Instead, a potential limitation of our identification strategy is that some firms may have private information about tax hikes before investment plans are reported in the fall (Riedel and Simmler, 2021). If this was the case, firms would-at least partially-incorporate this information into their investment plans and hence revise their investment decisions less strongly on average.…”

Fiscal Consequences of Corporate Tax Avoidance

“…Other municipal taxes such as a tax on dog ownership are negligible (€1 billion, 1%).10 Foremny and Riedel (2014) observe a political cycle in tax setting as the growth in the multiplier is significantly reduced in the election year and the year prior to the election, while it significantly increases in the year after the election. Also for Germany,Riedel and Simmler (2021) find that municipalities that host large firms tend to have lower trade tax rates.11 Note that trade tax is levied not only on corporations but also on the non-incorporated sector such as sole proprietorships and partnerships. Our firm-level data only includes corporations, so we will focus on those in the remainder of the paper.…”