Corporate Taxation and Productivity Catch-Up: Evidence from European Firms

In this paper, we explore whether higher corporate tax rates, because they lower the after-tax returns to productivity-enhancing investments, reduce the speed with which small firms converge to the productivity frontier. Using data for 11 European countries, we find evidence that their productivity catch-up is slower when the statutory corporate tax rates are higher. In contrast, we find that large firms are instead affected by effective marginal rates. Using the reduced-form model of productivity convergence of Griffith et al. (2009, Journal of Regional Science 49, 689-720), our results are robust to a host of robustness checks and a natural experiment that exploits the 2001 German tax reforms.