Tax differentials in intraregional firm location: evidence from new manufacturing establishments in Spanish municipalities

Abstract

This paper analyses empirically how differences in local taxes affect the intraregional location of new manufacturing plants. These effects are examined within the random profit maximization framework. We look at the location decision of more than 10,000 manufacturing establishments locating between 1996 and 2003 across more than 400 municipalities in Catalonia, a Spanish region. We find that local taxes on business and property have a significant negative effect on the location of new manufacturing establishments. It is necessary to restrict the choice set to the local labor market and, above all, to control for agglomeration economies so as to identify the effects of taxes on the location of new establishments.