Large and influential: firm size and governments' corporate tax rate choice?


Theory suggests that large firms are more likely to engage in lobbying behaviour and have better bargaining positions against their host governments than smaller entities. Conditional on jurisdiction size, public policy choices are thus predicted to depend on the  shape  of  a  jurisdiction’s  firm  size  distribution,  with  more  business-friendly  policies being enacted if economic activity is concentrated in a small number of entities. We  empirically  assess  this  prediction  studying  local  business  tax  choices  of  German municipalities.  Exploiting rich and quasi-experimental variation in localities’ firm size structures,  we find evidence for an inverse relationship between the concentration of economic  activity  and  communities’  business  tax  choices.   The  effect  is  statistically significant and quantitatively relevant, suggesting that the rising importance of large businesses may trigger shifts towards a more business-friendly design of (tax) policies.


Tobias Böhm, Nadine Riedel & Martin Simmler