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

40 Pages Posted: 26 Apr 2013

See all articles by Norman Gemmell

Norman Gemmell

Victoria University of Wellington - Victoria Business School

Richard Kneller

University of Nottingham

Danny McGowan

University of Nottingham

Ismael Sanz

Universidad Rey Juan Carlos

José F. Sanz-Sanz

Universidad Complutense de Madrid (UCM)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2013

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.

Keywords: productivity, taxation, convergence

JEL Classification: D24, H25, L11, O31

Suggested Citation

Gemmell, Norman and Kneller, Richard and McGowan, Danny and Sanz, Ismael and Sanz-Sanz, José F., Corporate Taxation and Productivity Catch-Up: Evidence from European Firms (March 1, 2013). Available at SSRN: https://ssrn.com/abstract=2256750 or http://dx.doi.org/10.2139/ssrn.2256750

Norman Gemmell (Contact Author)

Victoria University of Wellington - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

Richard Kneller

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Danny McGowan

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Ismael Sanz

Universidad Rey Juan Carlos ( email )

Calle Tulipán, s/n
Madrid, Móstoles 28230
Spain

José F. Sanz-Sanz

Universidad Complutense de Madrid (UCM) ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain

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