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

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  • Gemmell, Norman
  • Kneller, Richard
  • McGowan, Danny
  • Sanz, Ismael
  • Sanz-Sanz, José F.

Abstract

Firms that lie 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 underinvest in their productivity. In this paper we explore how far higher rates of corporate taxation affect firm productivity convergence by reducing 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 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.

Suggested Citation

  • Gemmell, Norman & Kneller, Richard & McGowan, Danny & Sanz, Ismael & Sanz-Sanz, José F., 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European firms," Working Paper Series 2705, Victoria University of Wellington, Chair in Public Finance.
  • Handle: RePEc:vuw:vuwcpf:2705
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    Keywords

    Productivity; taxation; convergence;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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