The Use of SME Tax Incentives in the European Union

127 Pages Posted: 2 Feb 2017

See all articles by Sören Bergner

Sören Bergner

University of Mannheim

Rainer Bräutigam

ZEW – Leibniz Centre for European Economic Research

Maria Evers

ZEW – Leibniz Centre for European Economic Research

Christoph Spengel

Centre for European Economic Research (ZEW)

Date Written: January 15, 2017

Abstract

This paper discusses the impact and the appropriateness of tax incentives for small and medium-sized enterprises (SMEs) in the European Union. First, we provide a survey of implemented tax incentives specifically targeted at SMEs in the 28 EU Member States. Building hereon, we measure the impact of these regimes on the effective tax burdens of targeted companies. We find that SME tax incentives are a commonly used measure among European policy makers. The vast majority of regimes, however, only marginally reduce the tax liability of SMEs. If major reliefs are available, they mostly stem from special tax rates whereas tax credits and special allowance play a minor role. In the second main part of the analysis, we examine the arguments potentially justifying the usage of SME tax incentives. As a main result, small firms per se do not create more jobs and innovations nor do they face insurmountable financing constraints. The existence of market failures commonly associated with SMEs – and possibly warranting the use of SME tax incentives – can therefore not be confirmed. Instead, disproportionate tax compliance costs for small entities constitute the most compelling argument for a special tax treatment. These compliance costs can most appropriately be addressed by administrative reliefs. Special tax rates, tax credits and allowances, in contrast, are not only inefficient but also ineffective in this regard. Instead of improving the neutrality of the overall tax system, the latter are likely to add further distortions and unnecessary complexity. Altogether, the focus of policy-makers should thus shift from providing discriminatory incentives to the design of a generally neutral and simple tax system, which would benefit small as well as large enterprises.

Keywords: SME, Tax Policy, European Union

JEL Classification: H24, H25

Suggested Citation

Bergner, Sören and Bräutigam, Rainer and Evers, Maria and Spengel, Christoph, The Use of SME Tax Incentives in the European Union (January 15, 2017). ZEW - Centre for European Economic Research Discussion Paper No. 17-006, Available at SSRN: https://ssrn.com/abstract=2910339 or http://dx.doi.org/10.2139/ssrn.2910339

Sören Bergner (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Rainer Bräutigam

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Maria Evers

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Christoph Spengel

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany

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