Is the corporation tax a barrier to productivity growth?


Evidence shows that size matters in terms of productivity. Within this literature, this paper analyses whether corporation tax penalises the productivity growth of smaller enterprises (SEs) (< 20 workers). For this purpose, we use a sample of Spanish manufacturing companies for the period 1996 to 2009. Results show that corporation tax has a negative effect upon productivity growth in companies with the greatest profitability, whether large or small. However, in relative terms, this barrier is greater for SEs. The results therefore show that corporation tax prevents the SMEs in Spain from improving their low productivity.

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Fig. 1
Fig. 2


  1. 1.

    Where technological improvements are embodied in new capital, and the measurement of this capital is unable to fully capture ‘quality’ improvements, some of this innovative improvement may appear to be attributable to company investment rather than TFP. This raises important issues for the measurement and interpretation of changes in capital stock and TFP.

  2. 2.

    The Stata built-in command developed by Petrin et al. (2004) has been used.

  3. 3.

    To this category belong companies whose net turnover was below the following thresholds: 1.5 million euros in 1996, 3 million from 2001, 5 million from 2003 and 8 million from 2005.

  4. 4.

    In 1996, the reduced rate was applied to the first 90,000 euros of the taxable base. This figure was raised to 120,201 in 2009. The statutory general rate was applied to the rest of the taxable base.

  5. 5.

    In doing this, we avoid our results being contaminated by the tax treatment of savings in the personal income tax. Originally, King and Fullerton (1984) determined the nominal discount rates for three alternative forms of finance: debt, retained earnings and equity. In quantifying these discount rates they took into account the tax treatment in personal income taxation. Specifically, ρ = i(1 − τ) for debt finance, ρ = i(1 − m)/(1 − z) for retained earnings and ρ = i/θ for new share issues, where m is marginal tax rates for interest income, z is the effective tax rate for capital gains and θ is the imputation rate in the case of dividend payments. However, the assumption of different discount rates depending on the form of finance has been subject to some criticisms, see Scott (1987).

  6. 6.

    In both graphs, the user cost of each company is weighted in accordance with its level of production


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We are grateful to the Editor and two anonymous referees for their comments and suggestions.

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Correspondence to Desiderio Romero-Jordán.

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Romero-Jordán, D., Sanz-Labrador, I. & Sanz-Sanz, J.F. Is the corporation tax a barrier to productivity growth?. Small Bus Econ 55, 23–38 (2020).

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  • SME policy
  • Corporation tax
  • Productivity growth
  • Small firms

JEL codes

  • L53
  • H25
  • L25
  • L26
  • L6