What doesn’t kill us makes us stronger? Corporate taxation and total factor productivity growth

• In Event: Taxation and Innovation

Abstract

This paper examines the impact of corporate income tax rates at the local level on establishment-level productivity growth using a panel dataset of over 50,000 German manufacturing and service establishments from 1995 to 2018. We document a robust nonlinear relationship: higher tax rates enhance productivity growth among establishments near the technological frontier but this advantage does not accrue to less productive establishments further from the frontier. In line with theoretical framework of Acemoglu et al. (2018), we then show that this response is more pronounced when the tax rates correspond with greater exits of establishments in the same commuting zone, consistent with a reallocation of resources from less productive establishments that exit to frontier establishments. Our findings suggest that higher business taxes push less productive firms out of the market, which in turn increases productivity growth at the frontier. When we distinguish exits by the type of resources freed up in a commuting zone, we find especially strong effects for staff and – to a smaller extent – for equipment. Our results underscore the importance of local tax policy in shaping productivity dynamics through firm selection and resource reallocation mechanisms.

Authors

• Sebastian Eichfelder, Otto-von-Guericke-Universität Magdeburg

• Kelly Wentland, George Mason University

• Hang Nguyen