Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Di¤erentials?

Low corporate taxes can help attract new \u85rms. This is the main mechanism under-pinning the standard race-to-the-bottomview of tax competition. A recent theoretical literature has quali\u85ed this view by formalizing the argument that agglomeration forces can reduce \u85rms sensitivity to tax di¤erentials across locations. We test this proposi-tion using data on \u85rm startups across Swiss municipalities. We \u85nd that, on average, high corporate income taxes do deter new \u85rms, but that this relationship is signi\u85cantly weaker in the most spatially concentrated sectors. Location choices of \u85rms in sectors with an agglomeration intensity at the twentieth percentile of the sample distribution are estimated to be twice as responsive to a given di¤erence in local corporate tax burdens as rms in sectors with an agglomeration intensity at the eightieth percentile. Hence, our analysis con\u85rms the theoretical prediction: agglomeration economies can neutralize the impact of tax di¤erentials on \u85rmslocation choices. JEL Classi\u85cation: R3, H3