Infrastructure and Business Taxation

Speaker: Dr Tim Ruberg

Affiliation: University of Tokyo

Location: Level 6 Boardroom (629), Colin Clark Building (#39), St Lucia Campus

Zoom: https://uqz.zoom.us/j/82603079317

Abstract: We study the impact of regional public infrastructure on business tax, the largest source of local governments' revenue in many countries around the globe. We use the expansion of the high-speed railway (HSR) network in Germany as a shock to study impacts on regions' business tax revenue and its underlying factors, i.e., firms' profitability, the number of firms, and the municipality’s tax rate. Access to the (pre-existing) HSR network in Germany between 1999 and 2010 represents an exogenous shock to regions located between two metropolitan areas, because allocation of new HSR stations was determined by topological, political, and environmental considerations, rather than expected passenger numbers and profits. Using a staggered difference-in-differences approach, we find a large, persistent increase in business tax revenues following the opening of an HSR station. This effect is almost entirely driven by existing firms becoming more profitable. Welfare calculations show that 14\% of the investment costs financed by the federal government, the federal states, and the national railroad company will materialize as revenues in municipal budgets through elevated business tax revenues. Thus, investments in inter-regional infrastructure can be regarded as a fiscal transfer from the upper to the lower administrative level, which strongly reduces regional inequalities.