The Effect of Effective Tax Rate Differentials and Clustering on Investment in Belgium

Abstract

This paper looks at the effect of agglomeration economies on the tax sensitivity of investments in Belgian firms using detailed firm-level data. We find a negative effect of taxation on investment.However, this is dampened by the presence of agglomeration externalities. Our results hint to the importance of local labor market and supplying industries for firm investment decisions and follow the more nuanced view on tax competition of the New Economic Geography models. I thank the Flemish government for the funding of this project through the Steunpunt Fiscaliteit en Begroting. I also thank Joep Konings, Freddy Heylen en Carine Smolders for their support and comments.