Firm mobility and jurisdictions' tax rate choices: Evidence from immobile firm entry

Capital mobility is one of the key determinants of corporate tax rates. We first show theoretically thatgovernments will set higher tax rates on firm profits after an immobile firm has entered. We then testthis prediction in a well-identified setting, using the rapid growth of wind power plants (a very immobileindustry) and the large variation in local business taxes across Germany for identification. We confirmthat municipalities increase corporate tax rates by up to 24% after immobile firm entry. The effect isstronger when immobile firms make up a larger share of the overall tax base. (c) 2021 Elsevier B.V. All rights reserved.