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Do Corporate Taxes Harm Economic Performance? Explaining Distortions In R&D- And Export-Intensive Uk Firms

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  • Bournakis, Ioannis
  • Mallick, Sushanta

Abstract

This paper analyzes the effects of corporate tax liability on firm-level total factor productivity (TFP) as the key driver of economic performance. This is a new dimension in the UK productivity puzzle that has not attracted attention so far. We use 6559 manufacturing firms over 2004–2011 to investigate whether higher levels of corporate tax affect the productivity catch-up process by reducing after-tax earnings that could alternatively be used for productivity-enhancing investment, particularly focusing on R&D- and export-intensive firms. Our key results are summarized as follows: first, higher levels of corporate taxation impact adversely on TFP and this finding is robust to different tax measures and insensitive to endogeneity bias; second, as R&D- and export-intensive firms tend to have relatively higher TFP growth, higher levels of tax liability as a share of earnings before interest and taxes decelerate TFP growth of these firms.

Suggested Citation

  • Bournakis, Ioannis & Mallick, Sushanta, 2021. "Do Corporate Taxes Harm Economic Performance? Explaining Distortions In R&D- And Export-Intensive Uk Firms," Macroeconomic Dynamics, Cambridge University Press, vol. 25(1), pages 5-27, January.
    • Handle: RePEc:cup:macdyn:v:25:y:2021:i:1:p:5-27_2
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    Citations

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    Cited by:

    1. Ioannis Bournakis & Mike Tsionas, 2024. "A Non‐parametric Estimation of Productivity with Idiosyncratic and Aggregate Shocks: The Role of Research and Development (R&D) and Corporate Tax," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 86(3), pages 641-671, June.
    2. Zhu, Jun & Ho, Kung-Cheng & Luo, Sijia & Peng, Langchuan, 2023. "Pandemic and tax avoidance: Cross-country evidence," Economic Modelling, Elsevier, vol. 124(C).
    3. Bardaka, Ioanna & Bournakis, Ioannis & Kaplanoglou, Georgia, 2021. "Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity?," Economic Modelling, Elsevier, vol. 94(C), pages 908-922.
    4. Mellace, Giovanni & Ventura, Marco, 2023. "The short-run effects of public incentives for innovation in Italy," Economic Modelling, Elsevier, vol. 120(C).
    5. He, Yuhan & Yi, Yang, 2023. "Digitalization of tax administration and corporate performance: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    6. Bournakis, Ioannis & Papanastassiou, Marina & Papaioannou, Sotiris, 2020. "Multinationals and Domestic TFP: Market Shares, Agglomerations Gains and Foreign Ownership," MPRA Paper 106626, University Library of Munich, Germany.
    7. Guo, Dongmei & Li, Qin & Liu, Peng & Shi, Xunpeng & Yu, Jian, 2023. "Power shortage and firm performance: Evidence from a Chinese city power shortage index," Energy Economics, Elsevier, vol. 119(C).
    8. Ryota Nakatani, 2024. "Multifactor productivity growth enhancers across industries and countries: firm-level evidence," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 14(2), pages 401-446, June.
    9. Tang, Meili & Wang, Yu, 2022. "Tax incentives and corporate social responsibility: The role of cash savings from accelerated depreciation policy," Economic Modelling, Elsevier, vol. 116(C).
    10. Chen, Jin & Li, Dan & Liang, Jingjing & Sun, Churen, 2023. "Does corporate income tax reduction prompt firm export concentration?," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 894-909.
    11. Bournakis, Ioannis & Tsionas, Mike, 2022. "Productivity with Endogenous FDI Spillovers: A Novel Estimation Approach," International Journal of Production Economics, Elsevier, vol. 251(C).
    12. Khanna, Rupika & Sharma, Chandan, 2021. "Do technological investments promote manufacturing productivity? A firm-level analysis for India," Economic Modelling, Elsevier, vol. 105(C).
    13. von Brasch, T. & Cappelen, Å. & Hungnes, H. & Skjerpen, T., 2021. "Modeling R&D spillovers to productivity: The effects of tax credits," Economic Modelling, Elsevier, vol. 101(C).

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