Corporate Taxation and the Productivity and Investment Performance of Heterogeneous Firms: Evidence from OECD Firm-Level Data

Abstract

This paper adds to the recent literature use micro-level data to examine the response of firms� productivity levels or growth rates to various policy settings. Our particular interest is to investigate how far corporate tax settings might affect firms� innovation and risk-taking activity. Previous investigations of this issue have examined the link between higher corporate taxes and firm-level total factor productivity (TFP) as mediated through higher profitability. That is, firms with higher corporate profits but in regimes involving higher corporate tax rates are expected to have lower TFP than equivalent firms in low corporate tax regimes. In this paper we re-examine this evidence � which has suggested apparently large and persistent impacts of corporate tax on firm-level TFP, as mediated through profits. We then consider how far alternative indicators of firm-level innovation/technology can provide better proxies for the impact of taxes on productivity via innovation effects than those based on firm profits. Using an econometric model of innovation and productivity similar to that proposed by Griffith et al. (2006) and Schwellnus and Arnold (S&A, 2008), we show that: � Using a similar sized sample to S&A (2008) but which does not exclude small (<20 employee) firms, the estimated impact of higher corporate tax rates on TFP when interacted with firm profit levels is no longer implausibly large and occurs relatively quickly (within 4-5 years rather than over decades). � Using alternative measures of industries� innovative characteristics such as research intensity, the extent of intra-industry trade and firm entry-exit rates, we find stronger evidence that firms in those �innovation intensive� industries are more adversely affected by high corporate tax rates than those in low �innovation intensive� industries. � Higher corporate tax rates, via their effect on the post-tax user cost of capital have significant adverse effects on firm�s investment levels.