European Firm Concentration and Aggregate Productivity

with Filippo di Mauro, Marc Melitz and Matthias Mertens
Journal of the European Economic Association, Volume 21 - Issue 2 , April 2023

Job Market Paper

The Contribution of Declining Corporate Taxes to Deindustrialization

Did the decline in corporate taxation contribute to the declining manufacturing share observed in all the advanced countries? This article shows that corporate tax cut was one of the reasons.
I combine longitudinal administrative firm-level data of Germany with 8,000 local tax changes for identification. Using Difference-in-difference estimations, I show that local tax changes move the local manufacturing share in the same direction. Firm-level results reveal this is due to wage, employment, firm-entry and labor productivity in the service sector being more elastic to a tax shock than in manufacturing. With this evidence in mind, I calibrate a two-sector heterogeneous agents firm dynamics model with profit tax to show that a long run corporate tax cut disproportionally advantage service firms contributing to the sectoral reallocation from manufacturing to service.


Javier Miranda (supervisor)
Full Professor
Friedrich Schiller University Jena & Halle Institute for Economic Research

Marc Melitz
Full Professor
Harvard University, NBER & CEPR

Reint Gropp
Halle Institute for Economic Research