Is the corporation tax a barrier to productivity growth?

Abstract

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.

This is a preview of subscription content, log in to check access.

Fig. 1
Fig. 2

Notes

  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 levpet.do 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

References

  1. Aghion, P., Fally, T., & Scarpetta, S. (2007). Credit constraints as a barrier to the entry and post entry growth of firms: theory and evidence. Economic Policy, 22, 731–779. https://doi.org/10.1111/j.1468-0327.2007.00190.x.

    Article  Google Scholar 

  2. Almunia, M., & López-Rodríguez, D. (2018). Under the radar: the effects of monitoring firms on tax compliance. American Economic Journal: Economic Policy, 10, 1–38. https://doi.org/10.1257/pol.20160229.

    Article  Google Scholar 

  3. Antonelli, C., Crespi, F., & Scellato, G. (2015). Productivity growth persistence: firm strategies, size and system properties. Small Business Economics, 45, 129–147. https://doi.org/10.1007/s11187-015-9644-2.

    Article  Google Scholar 

  4. Arnold, J. T., Brys, B., Heady, C., Johansson, A., Schwellnus, C., & Vartia, L. (2011). Tax policy for economic recovery and growth. Economic Journal, 121, 59–80. https://doi.org/10.1111/j.1468-0297.2010.02415.x.

    Article  Google Scholar 

  5. Auerbach, A. J., Devereux M. P., & Simpson H. (2010). Taxing corporate income. En Institute for Fiscal Studies (Ed.), the Mirrlees review: Dimensions of tax design. Oxford: Oxford University Press. DOI: https://doi.org/10.1920/co.ifs.2001.0086.

  6. Bank of Spain. (2014). Annual Report 2014. In Madrid.

    Google Scholar 

  7. Bank of Spain. (2015). Annual Report 2015. In Madrid.

    Google Scholar 

  8. Bank of Spain. (2016). Annual Report 2016. In Madrid.

    Google Scholar 

  9. Bartelsman, E., & Doms, M. (2000). Understanding productivity: lessons from longitudinal microdata. Journal of Economic Literature, 38, 569–594. https://doi.org/10.1257/jel.38.3.569.

    Article  Google Scholar 

  10. Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: access to finance as a growth constraint. Journal of Banking and Finance, 30, 2931–2943. https://doi.org/10.1016/j.jbankfin.2006.05.009.

    Article  Google Scholar 

  11. Bencivenga, V. R., Smith, B. D., & Starr, R. M. (1995). Transaction costs, technological choice and economic growth. Journal of Economic Theory, 67, 153–177. https://doi.org/10.1006/jeth.1995.1069.

    Article  Google Scholar 

  12. Bender, S., Bloom, N., Card, D., Van Reenen, J., & Wolter, S. (2018). Management practices, workforce selection, and productivity. Journal of Labor Economics, 36, S371–S409. https://doi.org/10.1086/694107.

    Article  Google Scholar 

  13. Bloom, N., & Van Reenen, J. (2007). Measuring and explaining management practices across firms and countries. Quarterly Journal of Economics, 122, 1351–1408. https://doi.org/10.1162/qjec.2007.122.4.1351.

    Article  Google Scholar 

  14. Bloom, N., & Van Reenen, J. (2010). Why do management practices differ across firms and countries? Journal of Economic Perspectives, 24, 203–224. https://doi.org/10.1257/jep.24.1.203.

    Article  Google Scholar 

  15. Bloom, N., Sadun, R., & Van Reenen, J. (2016). Management as a Technology? NBER Working Paper No. 22327.

  16. Bond, S., Elston, J. A., Mairesse, J., & Mulkay, B. (2003). Financial factors and investment in Belgium, France, Germany, and the United Kingdom: A comparison using company panel data. Review of Economics and Statistics, 85, 153–165. https://doi.org/10.1162/003465303762687776.

    Article  Google Scholar 

  17. Caldera, A. (2010). Innovation and exporting: evidence from Spanish manufacturing firms. Review of World Economics, 146, 657–689. https://doi.org/10.1007/s10290-010-0065-7.

    Article  Google Scholar 

  18. Cassiman, B., Golovko, E., & Martínez-Ros, E. (2010). International Journal of Industrial Organization, 28, 372–376. https://doi.org/10.1016/j.ijindorg.2010.03.005.

    Article  Google Scholar 

  19. Círculo de Empresarios (2013). La empresa mediana española. Documentos del Círculo, Octubre.

  20. Devereux, M. P., & Griffith, R. (1998a). Taxes and the location of production: evidence from a panel of US multinationals. Journal of Public Economics, 68, 335–367. https://doi.org/10.1016/S0047-2727(98)00014-0.

    Article  Google Scholar 

  21. Devereux, M. P. and Griffith, R. (1998b). The taxation of discrete investment choices – Revision 2, Institute for Fiscal Studies Working Paper Series No. W98/16, London.

  22. Devereux, M. P., & Griffith, R. (2003). Evaluating tax policy for location decisions. International Tax and Public Finance, 10, 107–126. https://doi.org/10.1023/A:1023364421914.

    Article  Google Scholar 

  23. Devereux, M., & Sörensen, P. B. (2006). The corporate income tax: international trends and options for fundamental reform. European Commision, Economic papers, 264.

  24. Egger, P., Loretz, S., Pfaffermayr, M., & Winner, H. (2009). Firm-specific forward-looking effective tax rates. International Tax and Public Finance, 16, 850–870. https://doi.org/10.1007/s10797-009-9124-1.

    Article  Google Scholar 

  25. Estrada, A. & Vallés, J. (1995). Investment and financial costs Spanish evidence with panel data, Bank of Spain, Working Paper 9506.

  26. European Commission (2014). Country Report Spain, 2014. Brussels: European Commission.

  27. Fazzari, S. M., Hubbard, R. G., Petersen, B. C., Blinder, A. S., & Poterba, J. M. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, (1), 141–206. https://doi.org/10.2307/2534426.

  28. Gandoy, R., & González, B. (2004). El comportamiento de la industria tradicional. Economia Industrial, 355-356, 25–36.

    Google Scholar 

  29. Garcia-Santana, M., Moral Benito, E., Pijoan_Mas, M. & Ramos, R. (2016). Growing like Spain: 1995–2007. Bank of Spain, Working Paper 1609.

  30. Gemmell, N., Kneller, R., Sanz, J. F., & Sanz, I. (2010). Corporate taxation and the productivity and investment performance of heterogeneous firms: evidence from OECD micro-level data. Documentos de Trabajo FUNCAS, 527.

  31. Gemmell, N., Kneller, K., McGowan, D., Sanz, I., & Sanz-Sanz, J. F. (2018). Corporate taxation and productivity catch-up: evidence from European firms. Scandinavian Journal of Economics, 120, 372–399. https://doi.org/10.1111/sjoe.12212.

    Article  Google Scholar 

  32. Gibbons, R. & Henderson, R. (2013). What do managers do? Handbook of organizational economics Gibbons, R. & Roberts, J. (edit), 680–731. Princeton: Princeton University Press. https://doi.org/10.1080/08963568.2013.794586

  33. Griffith, R., Redding, S., & Simpson, H. (2009). Technological catch-up and geographic proximity. Journal of Regional Science, 49, 689–720. https://doi.org/10.1111/j.1467-9787.2009.00630.x.

    Article  Google Scholar 

  34. Guner, N., Ventura, G., & Xu, Y. (2008). Macroeconomic implications of size-dependent policies. Review of Economics Dynamics, 11, 721–744. https://doi.org/10.1016/j.red.2008.01.005.

    Article  Google Scholar 

  35. Hall, R. E., & Jorgenson, D. L. (1967). Tax policy and investment behavior: reply and further results. American Economic Review, 59, 388–401.

    Google Scholar 

  36. Haneda, S., & Itob, K. (2018). Organizational and human resource management and innovation: which management practices are linked to product and/or process innovation? Research Policy, 47, 194–208. https://doi.org/10.1016/j.respol.2017.10.008.

    Article  Google Scholar 

  37. Hernández-Espallardo, M., & Delgado-Ballester, E. (2009). Product innovation in small manufacturers, market orientation and the industry’s five competitive forces: empirical evidence from Spain. European Journal of Innovation Management, 12, 470–491. https://doi.org/10.1108/14601060910996927.

    Article  Google Scholar 

  38. Himmelberg, C. P., & Petersen, B. C. (1994). R&D and internal finance: a panel study of small firms in high-tech industries. Review of Economics and Statistics, 76, 38–51. https://doi.org/10.2307/2109824.

    Article  Google Scholar 

  39. Huergo, E., & Jaumandreu, J. (2004). Firms’ age, process innovation and productivity growth. International Journal of Industrial Organization, 22, 541–559. https://doi.org/10.1016/j.ijindorg.2003.12.002.

    Article  Google Scholar 

  40. Huerta, E. & Salas, V. (2018). Productividad y tamaño de las empresas: ¿Dónde están las palancas para el cambio? Huerta, E. and Moral M.J., (edit.), Innovación y Competitividad: desafíos para la industria española, 425–462. Madrid: Fundación de las Cajas de Ahorros, FUNCAS.

  41. IMF (2015). IMF Country Report No. 15/233, Spain. August.

  42. IMF (2017). IMF Country Report No. 17/24, Spain. January.

  43. Jorgenson, D. L. (1963). Capital theory and investment behaviour. American Economic Review, 53, 247–259.

    Google Scholar 

  44. King, R. G., & Levine, R. (1993). Finance, entrepreneurship, and growth. Journal of Monetary Economics, 32, 513–542. https://doi.org/10.1016/0304-3932(93)90028-E.

    Article  Google Scholar 

  45. King, M. & Fullerton, D. (1984). The taxation of income from capital: a comparative study of United States, the United Kingdom, Sweden and West Germany. The University of Chicago Press, Chicago and London. https://doi.org/10.3386/w1058.

  46. Lammersen, L. (2002). The measurement of effective tax rates: common themes in business management and economics. ZEW Discussion Papers, No. 02–46. https://doi.org/10.2139/ssrn.395260

  47. Lammersen, L.& R., Schwager, R. (2005). The effective tax burden of companies in European regions, ZEW Economic Studies, Physica, Heidelberg/New York. https://doi.org/10.1007/b138502

  48. Levinsohn, J., & Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. Review of Economic Studies, 70, 317–342. https://doi.org/10.1111/1467-937X.00246.

    Article  Google Scholar 

  49. Madrid-Guijarro, A., García, D., & Van Auken, H. (2009). Barriers to innovation among Spanish manufacturing SME. Journal of Small Business Management, 47, 465–488. https://doi.org/10.1111/j.1540-627X.2009.00279.x.

    Article  Google Scholar 

  50. Moral-Benito. (2018). Growing by learning: firm-level evidence on the size-productivity nexus. SERIEs, 9, 65–90. https://doi.org/10.1007/s13209-018-0176-2.

    Article  Google Scholar 

  51. Marschak, J., & Andrews, W. H. (1944). Random simultaneous equations and the theory of production. Econometrica, 12, 143–205. https://doi.org/10.2307/1905432.

    Article  Google Scholar 

  52. Myro, R. & Gandoy, R. (2003), Sector industrial- García Delgado (edit.), Lecciones de Economía Española, Thomson Civitas, Madrid.

  53. OECD (2014). Entrepreneurship at a Glance 2014. OECD Publishing. https://doi.org/10.1787/entrepreneur_aag-2014-en

  54. OECD (2016). Entrepreneurship at a Glance 2016. OECD Publishing. https://doi.org/10.1787/entrepreneur_aag-2016-en

  55. Oliveira, B., & Fortunato, A. (2006). Firm growth and liquidity constraints: a dynamic analysis. Small Business Economics, 17, 139–156. https://doi.org/10.1007/s11187-006-0006-y.

    Article  Google Scholar 

  56. Olley, G. S., & Pakes, A. (1996). The dynamics of productivity in the telecommunications equipment industry. Econometrica, 64, 1263–1297. https://doi.org/10.2307/2171831.

    Article  Google Scholar 

  57. Petrin, A., Poi, B. P., & Levinsohn, J. (2004). Production function estimation in Stata using inputs to control for unobservables. Stata Journal, 4, 113–123. https://doi.org/10.1177/1536867X0400400202.

    Article  Google Scholar 

  58. Pozi, A., & Schivardi, F. (2016). Demand or productivity: what determines firm growth? RAND Journal of Economics, 47, 608–630. https://doi.org/10.1111/1756-2171.12142.

    Article  Google Scholar 

  59. Rajan, R., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88, 559–586 https://www.jstor.org/stable/116849.

    Google Scholar 

  60. Rochina-Barrachina, M. E., Mañez, J. A., & Sanchís-Llopis, J. A. (2010). Process innovations and firm productivity growth. Small Business Economics, 34, 147–166 https://www.jstor.org/stable/40540463.

    Article  Google Scholar 

  61. Schaller, H. (1993). Asymmetric information, liquidity constraints, and Canadian investment. Canadian Journal of Economics, 26, 552–574. https://doi.org/10.2307/135887.

    Article  Google Scholar 

  62. Schwellnus, C. & Arnold, J. (2008). Do corporate taxes reduce productivity and investment at the firm level? Cross-country evidence from the Amadeus dataset, OECD Economics Department Working Papers, 641. https://doi.org/10.1787/236246774048

  63. Scott, M. F. G. (1987). A note on King and Fullerton’s formulae to estimate taxation on income form capital. Journal of Public Economics, 34, 253–264. https://doi.org/10.1016/0047-2727(87)90023-5.

    Article  Google Scholar 

  64. Syverson, C. (2011). What determines productivity? Journal of Economic Literature, 49, 326–365. https://doi.org/10.1257/jel.49.2.326.

    Article  Google Scholar 

  65. Tsuruta, D. (2018). SME policies as a barrier to growth of SMEs. Small Business Economics, in press. https://doi.org/10.1007/s11187-018-0119-0.

  66. Van Auken, H., Madrid-Guijarro, A., & García Pérez de Lema, D. (2008). Innovation and performance in Spanish manufacturing SMEs. International Journal of Entrepreneurship and Innovation Management, 8, 36–56. https://doi.org/10.1504/IJEIM.2008.018611.

    Article  Google Scholar 

  67. Villar, C., Alegre, J., & Pla-Barber, J. (2014). Exploring the role of knowledge management practices on exports: a dynamic capabilities view. International Business Review, 23, 38–44. https://doi.org/10.1016/j.ibusrev.2013.08.008.

    Article  Google Scholar 

  68. Whited, T. (1992). Debt, liquidity constraints, and corporate investment: evidence from panel data. Journal of Finance, 47, 1425–1460. https://doi.org/10.1111/j.1540-6261.1992.tb04664.x.

    Article  Google Scholar 

  69. Woon Nam, C., & Radulescu, D. M. (2007). Effects of corporate tax reform on SME’s investment under the particular consideration of inflation. Small Business Economics, 29, 101–118. https://doi.org/10.1007/sl1187-006-0003-1.

Download references

Acknowledgements

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

Author information

Affiliations

Authors

Corresponding author

Correspondence to Desiderio Romero-Jordán.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

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). https://doi.org/10.1007/s11187-019-00136-x

Download citation

Keywords

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

JEL codes

  • L53
  • H25
  • L25
  • L26
  • L6