Agglomerations and Strategic Tax Competition

Evidence outside the tax arena suggests that firms earn rents in the presence of agglomerations, which could lessen the mobility of firms in the agglomeration. If so, then governments might be able to extract a portion of rents from businesses through higher tax rates without as much concern about capital fleeing the jurisdiction. Strategic interaction may also be affected by the presence of agglomerations if capital mobility is affected. This article empirically examines how local governments set sales and property tax rates, while considering tax competition and one specific measure of agglomerations. Results indicate that local governments behave as strategic complements, impose higher tax rates in jurisdictions with more establishments (or urbanization economies), and are less likely to mimic other governments' tax policies if their jurisdiction is agglomerated.