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Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-Country Evidence from the Amadeus Dataset

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  • Jens Arnold
  • Cyrille Schwellnus

Abstract

This paper uses a stratified sample of firms across OECD economies over the period 1996-2004 to analyse the effects of corporate taxes on productivity and investment. Applying a differences-in-differences estimation strategy which exploits differential effects of corporate taxes on firms with different profitability, it is found that corporate taxes have a negative effect on productivity at the firm level. The effect is negative across firms of different size and age classes except for the small and young, which may be attributable to the relatively low profitability of small and young firms. The negative effect of corporate taxes is particularly pronounced for firms that are catching up with the technological frontier. In the investment analysis, the results suggest that corporate taxes reduce investment through an increase in the user cost of capital. This may partly explain the negative productivity effects of corporate taxes if new capital goods embody technological change.

Suggested Citation

  • Jens Arnold & Cyrille Schwellnus, 2008. "Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-Country Evidence from the Amadeus Dataset," Working Papers 2008-19, CEPII research center.
    • Handle: RePEc:cii:cepidt:2008-19
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    References listed on IDEAS

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    1. Havrylchyk, Olena & Jurzyk, Emilia, 2011. "Inherited or earned? Performance of foreign banks in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1291-1302, May.
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    3. Suzanna De Boef & Luke Keele, 2008. "Taking Time Seriously," American Journal of Political Science, John Wiley & Sons, vol. 52(1), pages 184-200, January.
    4. Hans Degryse & Olena Havrylchyk & Emilia Jurzyk & Sylwester Kozak, 2008. "The Effect of Foreign Bank Entry on the Cost of Credit in Transition Economies. Which Borrowers Benefit the Most?," Working Papers 2008-15, CEPII research center.
    5. repec:bla:econom:v:71:y:2004:i::p:141-153 is not listed on IDEAS
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    More about this item

    Keywords

    Productivity; Growth; Corporate income tax; Firm level data; Fiscal policy;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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