New publication in the Journal of Urban Economics Insight

Firm mobility is a key determinant for municipalities’ local business tax rate choice. If firms are relatively immobile, municipalities can tax them at high rates as only few firms will relocate to other jurisdictions. In “Expectations about future tax rates and firm entry”, Dominika Langenmayr (Catholic University Eichstätt – Ingolstadt) and Martin Simmler (Thünen-Insitut) assess the impact of expectations about future tax rates for firms’ location decision today. To capture expectations about future tax rates – which are unobserved – they focus on the rapid emergence of wind turbines in Germany due to the introduction of generous subsidies in 2000. Wind turbines are highly immobile as their cost of relocation are very high. Building up on previous work, they first show that municipalities in which many wind turbines have been built after 2000 increased their local business tax rate. Then they simulate for each municipality expected wind turbine profits and assess its impact on the number of new (non-wind turbine) firms. Their results highlight that expectations matter and that around 10% fewer firms entered in the municipalities with the highest expected share of wind turbine profits.

Link to the article

Contact: Dr. Martin Simmler