University of Lausanne. Faculty of Business and Economics
Proceedings of the twelfth ETSG annual conference (online) pages:1-29
ETSG Annual Conference edition:12 location:University of Lausanne, Switzerland date:9-11 September 2010
The goal of this paper is to analyze the impact of tax rates and agglomeration rents – and more in particular their interaction - on location decisions of firms within Belgium. In the literature it is argued that both location determinants may enhance or rather weaken each other’s impact. Using the number of new firms at the sector level for 43 Belgian districts, we show that local effective tax rates either have no or a negative impact on location decisions. Before the Belgian corporate tax reform in 2003, demand-side induced agglomeration rents – market potential- have a positive impact on location decisions. Supply-side induced agglomeration rents - in terms of the number of existing firms – only increase entry within the same sector. However, the interaction effect between taxes and agglomeration rents on firm entry is significant. We observe that a higher effective tax rate in a district weakens the positive impact of the agglomeration rents on location decisions of firms.