Is agglomeration taxable?

Abstract

Several theoretical papers that examine tax competition with agglomeration effects have stressed the possibility that the governments of jurisdictions in which economic activity is concentrated may tax firms more heavily (taxable agglomeration rents). In this article, we examine the tax rate setting decisions taken with regard to the Spanish municipal business tax (Impuesto sobre Actividades Económicas). The analysis, carried out with a large sample of Spanish municipalities, focuses on the effect that urbanization economies and localization economies have on their business tax rates. High urbanization economies and localization economies are found to increase the business tax rate.