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Corporate Taxation and Productivity Catch-Up: Evidence from 11 European Countries

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  • Norman Gemmell
  • Richard Kneller
  • Danny McGowan
  • Ismael Sanz

Abstract

Firms that lay far behind the technological frontier have the most to gain from imitating the technology or management practices of others. That some firms converge relatively slowly to the productivity frontier suggests the existence of factors that cause them to under-invest in their productivity. In this paper we explore whether higher rates of corporate taxation affect firm productivity convergence because they reduce the after tax returns to productivity enhancing investments for small firms. Using data for 11 European countries we find evidence for such an effect; productivity growth in small firms is slower the higher are high corporate tax rates. Our results are robust to the use of instrumental variable and panel data techniques with quantitatively similar effects found from a natural experiment following the German tax reforms in 2001.

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Bibliographic Info

Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 12/06.

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Handle: RePEc:not:notecp:12/06

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Fax: (0115) 951 4159
Web page: http://www.nottingham.ac.uk/economics/
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Keywords: Productivity; taxation; convergence JEL classification: D24; H25; L11; O31;

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Cited by:
  1. Ioannis Bournakis & Sushanta Mallick & David Kernohan & Dimitris A.Tsouknidis, 2013. "Measuring Firm-Level Productivity Convergence in the UK: The Role of Taxation and R&D Investment," Working Papers 45, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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