Top

Small Business Economics

Published in:

31-01-2019

Is the corporation tax a barrier to productivity growth?

Authors: Desiderio Romero-Jordán, Ismael Sanz-Labrador, José Félix Sanz-Sanz

Published in: Small Business Economics | Issue 1/2020

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

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.

previous article Historical roots of regional entrepreneurship: the role of knowledge and creativity

next article Forecasting success in equity crowdfunding

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

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.

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

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.

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.

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).

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

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.CrossRef

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.CrossRef

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.CrossRef

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.CrossRef

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.

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

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

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

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.CrossRef

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.CrossRef

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.CrossRef

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.CrossRef

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.CrossRef

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.CrossRef

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

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.CrossRef

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.CrossRef

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.CrossRef

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

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.CrossRef

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.

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.CrossRef

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

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.CrossRef

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

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

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.

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

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

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.

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.CrossRef

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

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.CrossRef

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.CrossRef

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

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.CrossRef

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.CrossRef

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.CrossRef

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.CrossRef

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.

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

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

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

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.CrossRef

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.

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

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

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.CrossRef

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.CrossRef

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.CrossRef

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

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

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

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

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.CrossRef

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.CrossRef

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.CrossRef

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.CrossRef

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

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.CrossRef

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

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

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.CrossRef

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

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.

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.CrossRef

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.CrossRef

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.CrossRef

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.

Title: Is the corporation tax a barrier to productivity growth?
Authors: Desiderio Romero-Jordán
Ismael Sanz-Labrador
José Félix Sanz-Sanz
Publication date: 31-01-2019
Publisher: Springer US
Published in: Small Business Economics / Issue 1/2020
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-019-00136-x

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 1/2020

Firm bribery and credit access: evidence from Indian SMEs

A theoretical model of values and behaviors that shape technology region emergence in developing contexts

Diversification by young, small firms: the role of pre-entry resources and entry mistakes

Does firm growth increase corruption? Evidence from an instrumental variable approach

The impact of entrepreneurship education on university students’ entrepreneurial skills: a family embeddedness perspective

Forecasting success in equity crowdfunding

Premium Partner