Local fiscal policies and their impact on the number and spatial distribution of new firms

We examine the effect of local business taxation and local public good and service (PIGS) provision on the number and spatial distribution of new firms. The analysis draws on panel data for the universe of firm foundations in German municipalities, matched to municipalities' local business tax rates and the level and structure of their local PIGS provision. Methodologically, we estimate fixed effects poisson models coupled with a control function approach. The results suggest that local business taxation (PIGS provision) has a strong negative (positive) impact on the number of new firms in the policy-changing jurisdiction. Local business taxes are, moreover, found to exert beggar-thy-neighbor externalities on neigboring jurisdictions: tax reductions strongly lower the number of neighbors' firm foundations, implying that the aggregate number of new firms remains unchanged; while PIGS provision, on average, exerts no significant impact on the number of firms in adjacent jurisdictions, negative effects emerge for subsets of PIGS and firms.