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Corporate Taxation and Productivity Catch-Up: Evidence from European Firms

  • Norman Gemmel

    (Victoria University of Wellington, New Zealand)

  • Richard Kneller

    (University of Nottingham, UK)

  • Danny McGowan

    ()

    (Bangor University, UK)

  • Ismael Sanz

    (Universidad Rey Juan Carlos, Spain)

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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Paper provided by Bangor Business School, Prifysgol Bangor University (Cymru / Wales) in its series Working Papers with number 13001.

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Length: 35 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:bng:wpaper:13001
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