Threshold effects of agglomeration on local business taxation: Evidence from Spain

Abstract

In the foot-loose capital (FC) models, it is predicted that agglomeration forces create rents for the mobile factor (capital), which can be easily taxed, and therefore higher equilibrium tax rates are expected. In this paper, a highly flexible econometric specification (P-Spline spatial autoregressive model, PS-SAR) is used to examine the relationship between tax rates and agglomeration economies in Spain over the period 2013–2020. The existence of a minimum level of agglomeration economies required for taxable agglomeration rents, in a context of non-linearities, is found. A reassessment of the linear FC models is therefore necessary in order to disentangle the mechanisms that might lead to this fact.