Jordi Jofre Monseny, Albert Solé Ollé
Several theoretical papers that examine tax competition with agglomeration effects have stressed the possibility that those governments of jurisdictions in which economic activity is clustered can tax firms more heavily (taxable agglomeration rents). In this paper we examine the tax rate setting decision of the Spanish municipal business tax (Impuesto sobre Actividades Económicas).
The analysis, carried out with a sample of 2,621 municipalities, focuses on the effect that urbanization economies, localization economies and the market potential of municipalities have on its business tax rate. High urbanization economies, high localization economies and high market potential are all municipal attributes that are found to increase the business tax rate.
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