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

Firms that lie far behind the technological frontier have the most to gain from imitating the technology or management practices of others. That some firms converge relatively slowly to the productivity frontier suggests the existence of factors that cause them to underinvest in their productivity. In this paper we explore how far higher rates of corporate taxation affect firm productivity convergence by reducing the after tax returns to productivity enhancing investments for small firms. Using data for 11 European countries we find evidence for such an effect; productivity growth in small firms is slower the higher are corporate tax rates. Our results are robust to the use of instrumental variable and panel data techniques with quantitatively similar effects found from a natural experiment following the German tax reforms in 2001

Corporate taxation and productivity catch-up: evidence from European firms

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

Ciberseguridad en España: una propuesta para su gestión

Las relaciones sociales, económicas y culturales dependen, cada vez más, de las tecnologías e infraestructuras de la información y comunicación (ciberespacio), haciendo necesario articular un sistema nacional de seguridad (ciberseguridad) que gestione los riesgos que amenazan su funcionamiento. Las Tecnologías de la Información y la Comunicación (TIC) han coadyuvado al bienestar y progreso de las sociedades de forma que gran parte de las relaciones públicas y privadas dependen de estas tecnologías. Con el tiempo y la evolución de las TIC, han aparecido riesgos que hacen necesario gestionar su seguridad. Inicialmente, la ciberseguridad se ocupó de proteger la información (Information Security) de una manera reactiva, pero posteriormente ha evolucionado hacia una posición proactiva que identifica y gestiona los riesgos que amenazan el ciberespacio(Information Assurance). Este ARI realiza una aproximación a los conceptos de ciberespacio y ciberseguridad, a los riesgos y amenazas conocidos, a la gestión existente en España y a la necesidad de desarrollar un sistema nacional de ciberseguridad que fomente la integración de todos los actores e instrumentos, públicos o privados, para aprovechar las oportunidades de las nuevas tecnologías y hacer frente a los retos que presentan

LICOR-Liquid Columns' Resonances

The aim of the experiment LICOR was the investigation of the axial resonances oi cylindrical liquid columns supported by equal circular coaxiaJ disks. In preparation ot the D-2 experiment a •heoreiical model has been developed, which exactly describes the small amplitude oscillations of finite cylindrical columns between coaxial circular disks. In addition, in terrestrial experiments the resonance frequencies of small liquid columns with up to 5 mm in diameter have been determined and investigations with density-matched liquids (silicon oil in a waierlmethanol mixture) have been performed. For the D-2 experiment LICOR the front disk and the rear disk lor use in the AFPM have been constructed and equipped with pressure sensors and the necessary electronics. The pressure exerted by the oscillating liquid column on trie supporting disks vsas as low as 10 Pa. Since the data downlink of the Materials Research Laboratory was just one signal oer second and channel, it was necessary to determine amplitude and phase of the pressure already in the LICOR disks. The D-2 experiment has been successfully performed. It has fully confirmed the theoretical models and remarkably supplements the experiments on small liquid columns and on density-matched columns

A teleoperated facility for variable gravity level fluid physics experimentation

A facility to perform experiments on fluid physics and specially on the mechanical behavior of liquid bridges has been designed and built. The facility consists of a velocity controlled centrifuge than can be rotated at speeds up to 10 rpm with and arm of 1.5 m where the experiment container (a Plateau tank in which different mechanical stimuli can be imposed to the liquid column) can be fixed at any location. The rotating system transmits out a video signal for diagnosis and besides control and monitoring signals are routed to the external data management system. The facility and its control system has been implemented in a way that it is possible to control and monitor the experiments either locally from a control workstation or the entire facility can enter in a mode to be controlled remotely. In this case, the control workstation is located far away the facility (indeed in a different city) and linked with data lines. The purpose of this exercise is to gain experience on the minimum data bandwidth needed and the impact on orbital platforms fluid science experimentation of transmission delays and data loses. The latter effects are implemented in the data stream in a way that can be simulated at a rate much higher than that will be experienced otherwise

Fischer-Tropsch synthesis in microchannels

Different metallic supports (aluminum foams of 40ppi, honeycomb monolith and micromonolith of 350 and 1180cpsi, respectively) have been loaded with a 20%Co-0.5%Re/γ-Al2O3 catalyst by the washcoating method. Layers of different thicknesses have been deposited onto the metallic supports. The catalytic coatings were characterized measuring their textural properties, adhesion and morphology. These structured catalysts have been tested in the Fischer-Tropsch synthesis (FTS) and compared with a microchannel block presenting perpendicular channels for reaction and cooling. The selectivity depends on the type of support used and mainly on the thickness of the layer deposited. In general, the C5+ selectivity decreased at increasing CO conversion for all of the systems (powder, monoliths, foams and microchannels block). On the other hand, the selectivity to methane increased with the thickness of the catalytic layer due to the higher effective H2/CO ratio over the active sites resulting from the higher diffusivity of H2 compared with CO in the liquid products filling the pores. The C5+ selectivity of the microchannels reactor is higher than that of the structured supports and the powder catalyst.Ministerio de Ciencia e Innovación MAT2006-12386-C05, ENE2009-14522-C0

Wavelet packet decomposition for IEC compliant assessment of harmonics under stationary and fluctuating conditions

This paper presents the validation and characterization of a wavelet based decomposition method for the assessment of harmonic distortion in power systems, under stationary and non-stationary conditions. It uses Wavelet Packet Decomposition with Butterworth Infinite Impulse Response filters and a decomposition structure, which allows the measurement of both odd and even harmonics, up to the 63rd order, fully compliant with the requirements of the IEC 61000-4-7 standard. The method is shown to fulfil the IEC accuracy requirements for stationary harmonics, obtaining the same accuracy even under fluctuating conditions. Then, it is validated using simulated signals with real harmonic content. The proposed method is proven to be fully equivalent to Fourier analysis under stationary conditions, being often more accurate. Under non-stationary conditions, instead, it provides significantly higher accuracy, while the IEC strategy produces large errors. Lastly, the method is tested with real current and voltage signals, measured in conditions of high harmonic distortion. The proposed strategy provides a method with superior performance for fluctuating harmonics, but at the same time IEC compliant under stationary conditions

Corporate Taxation and the Productivity and Investment Performance of Heterogeneous Firms: Evidence from OECD Firm-Level Data

Abstract This paper adds to the recent literature use micro-level data to examine the response of firms' productivity levels or growth rates to various policy settings. Our particular interest is to investigate how far corporate tax settings might affect firms' innovation and risk-taking activity. Previous investigations of this issue have examined the link between higher corporate taxes and firm-level total factor productivity (TFP) as mediated through higher profitability. That is, firms with higher corporate profits but in regimes involving higher corporate tax rates are expected to have lower TFP than equivalent firms in low corporate tax regimes. In this paper we re-examine this evidence -which has suggested apparently large and persistent impacts of corporate tax on firm-level TFP, as mediated through profits. We then consider how far alternative indicators of firm-level innovation/technology can provide better proxies for the impact of taxes on productivity via innovation effects than those based on firm profits. Using an econometric model of innovation and productivity similar to that proposed by • Using a similar sized sample to S&A (2008) but which does not exclude small (<20 employee) firms, the estimated impact of higher corporate tax rates on TFP when interacted with firm profit levels is no longer implausibly large and occurs relatively quickly (within 4-5 years rather than over decades). • Using alternative measures of industries' innovative characteristics such as research intensity, the extent of intra-industry trade and firm entry-exit rates, we find stronger evidence that firms in those 'innovation intensive' industries are more adversely affected by high corporate tax rates than those in low 'innovation intensive' industries. • Higher corporate tax rates, via their effect on the post-tax user cost of capital have significant adverse effects on firm's investment levels. 2 Introduction Macro-dynamic modelling in recent years has made great strides in analysing the potential impact of changes in tax policy on a variety of macro variables including output and productivity levels and the transitional/long-run rates of output or productivity growth (e.g. Micro-level evidence -at the firm, industry or sector levels -is comparatively scarce; what there is tends to focus on tax impacts on investment in particular or factors expected to contribute to overall investment or productivity performance -such as research and exhibit lower total factor productivity (TFP) and investment levels compared to firms facing lower corporate tax rates. Based on the identifying assumption that "firm level TFP growth in very profitable sectors should be lower relative to sectors with low profitability in countries with high corporate taxes" they find that firm-level productivity appears to be lower in high tax country-year combinations. This may partly reflect companion evidence that investment is also lower in high tax contexts (in response to a higher user cost of capital) and if technological advances are at least partly embodied in this investment. 3 The Schwellnus and Arnold (S&A) analysis is an innovative and helpful advance in the methodologies applied to the study of the productivity effects of corporate tax changes but is limited by two aspects (methodological issues are discussed in more detail below (S&A, 2008, p.16). Arguably this estimate puts it in the 'implausibly large' category, in the same way that previous estimates based on aggregate level data have been described as implausibly large. In this paper, we examine a firm-level dataset for OECD countries very similar to that used by S&A to re-test for the tax-profitability effects on TFP measured by S&A. We further argue that, to the extent that corporate tax can be expected to impact on firms' innovation or risk-taking characteristics that are hypothesised to generate different TFP growth across firms, this may be captured by a number of firm characteristics, not just firms' overall profit levels. In particular we argue that corporate tax may impact on productivity via interactions with inter-firm differences in 'research intensity', the degree of intra-industry trade, and firms' entry/exit/survival characteristics. The remainder of the paper is structured as follows. In section 2 we discuss the relevant hypotheses linking corporate tax and firm productivity within an overall model of firm productivity. Section 3 then describes the data and methodology we use and section 4 discusses our econometric results. Section 5 draws some conclusions. How might firm-level taxation affect innovation/productivity processes? As S&A (2008) note, if successful innovations are measured by the net-of-tax rate of return, then to the extent that tax parameters drive a wedge between a firm's gross and net returns, they can be expected to discourage that innovative activity, that in turn impacts negatively on a firm's ability to improve its productivity levels, other things equal. In principle this applies to both incorporated and unincorporated enterprises -such that the relevant tax parameters will differ in each case depending on these enterprises' liabilities under personal, corporate and other tax schedules. In our empirical work we focus on incorporated firms so that it is the impact of effective rates of corporate tax that are most relevant. Corporate Tax, Technology and Total Factor Productivity Standard features of corporate tax in OECD countries typically include (i) the use of one or more statutory rates (e.g. some countries set lower rates at low profit levels); (ii) limitations on the extent of tax rebates for negative profits (losses) generating asymmetric treatment of profits and losses (e.g. 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 firms' investment rather than TFP. This raises important issues for the measurement and interpretation of changes in capital stock and TFP. 5 These have the effect of generating firm-specific ETRs that can be quite different from statutory rates of tax and also contributing some progressivity to most corporate tax regimes. This latter effect is especially associated with loss-making, and its tax treatment. As Auerbach (1') 2 Note that (1) can be re-arranged to be expressed in terms of the change in TFP, and Griffith et al allow for it to be applied only to firms whose TFP remains high enough to remain in the industry, with implications for methods of testing (see below). 6 where is the long-run growth rate of frontier technology and is the error correction parameter. Equation (1') captures heterogeneity in firm productivity across industries (and countries). It allows for endogenous productivity catch-up but the presence of γ i ensures that firms may converge towards their own equilibrium productivity path relative to that of the frontier firm(s). In the long-run, even if all firms' TFPs grow at the same rate, they are not necessarily converging to the same level. In addition, stochastic shocks to TFP together with the speed of correction to the steady-state mean that firms observed TFP may be 'transitional' for many periods. With the addition of a homogeneity assumption (that in the long-run all firms TFPs will grow at the rate of the frontier TFP), equation (1') can be rewritten in terms of firm's TFP relative to frontier levels, as: Equation 3 Conceptually this operates via the tax-wedge driven between the pre-and post-tax rates of return on innovations that drive each firm's productivity improvements (or declines -where tax affects declining firms or induces that decline). How we capture those tax impacts in our empirical model, we turn to next. An interesting question concerns what country-, industry-of firm-specific characteristics might drive firm-level productivity and which are also susceptible to corporate tax settings? Information of firms' individual corporate tax liabilities would allow us to explore this question directly; for example, is a higher tax liability via effective marginal tax rate associated with lower TFP? Unfortunately firm-level corporate tax data is unavailable. Statutory corporate tax rate data by country and time period is however available, and we can 3 Griffith et al (2006) include a firm-specific fixed effect to pick up those firm-level sources of innovation. Doing so in our case would effectively remove the firm-specific sources of variation that may be due to corporate tax effects and that it is desired to identify here. We therefore include country, industry and time fixed effects but exclude firm fixed effects. 7 examine how far this affects industry-specific factors expected to be impacted by corporate tax -such as profitability. The key insight of S&A The rationale is as follows. Ragan and Zingales (1998) argue that, if the level of financial development of an economy is important for its growth then, within a country, firms that have better access to sources of finance external to the firm should be less constrained, other things equal, than firms relying on internal finance. This suggests an empirical testing strategy that exploits the difference-in-difference approach recognising that firms within sectors that are inherently less dependent on internal finance should be observed to growth faster in countries that are more financially developed compared to firms in the same sectors in countries that are less financially developed. For present purposes, in effect S&A It is also worth noting that, since firm-level TFP might be expected to be positively, and endogenously, correlated with the firm's profitability (the tax base), the predicted negative impact on TFP of higher corporate tax rates arises despite this positive, endogenous relationship. That is, to the extent that profitability is thought to be determined simultaneously with TFP, this endogeneity should reduce, not increase, our likelihood of 8 finding a negative observed association between corporate tax liabilities and TFP. In addition, the use of industry-level profitability mitigates this possible endogeneity at firm level. The values of a firm's profits as reflected in company accounts (the S&A data source, and the one used in this paper) are often very different from profits liable to corporate tax (at the host country rate). Nevertheless, as a 'tax base' proxy, accounting profit might be expected to broadly capture the potential for more profitable industries to face higher tax liabilities. With profit measured relative to value added, a measure of industry 'profitability' interacted with the corporate tax rate represents a form of industry-level effective average tax rate. However, two important elements of the potential impact of corporate tax on TFP are the particular effects on innovation and risk-taking, with successful ventures (as evidenced, for example, in greater profitability) typically penalised disproportionately by corporate tax regimes. Various aspects of corporate tax regimes, other than the statutory rate, such as R&D tax credits or deductions for some or all types of investment, are aimed at reducing the adverse impact of corporation tax on firm's 'success'. These may not be observed through levels of firms' accounting profits, but rather through choices over types of investment or the extent of activities that give rise to reductions in taxable profits via increased deductions. To the extent that these aspects, stimulated by the corporate tax regime, generate productivity improvements (as opposed to corporate tax minimising strategies with no 'real' economic benefits) they should be evident in firm-level TFP. Of course, even where taxable profits are available, these will allow tests of the influence of corporate tax on TFP via profitability which cannot specifically test the hypothesis that it is the impact of tax on firms' innovation and risk-taking activities that acts as the mechanism by which higher corporate tax rates reduce productivity. Any firm with a higher level of profitability but where these profits are taxed more highly could expect to experience lower TFP levels of growth. For example, the availability of internal sources of finance may be the binding constraint on firms' investment that would enhance productivity. In this case corporate tax will adversely affect productivity but it may be unrelated to firms' willingness or ability to innovate or make risky investment choices. While measures of innovation or risk-taking are necessarily imprecise and difficult to pin down, we propose to test how far indictors that are more likely to be closely associated with innovation/risk-taking (than is profitability) are associated with lower TFP when 9 combined with higher corporate tax rates. In particular, innovation is often argued to be associated with research-intensity, with Research & Development (R&D) argued to be a prerequisite for successful innovative products and processes Hence, if firms in similar industries (for example, in terms of R&D intensity) are located in different countries (x and z), and hence face different corporate tax rates, this should generate lower TFP in the higher-tax equivalent firms in country x compared to those in lower-tax country z. We discuss these issues further below. Data and Methodology Our firm-level data comes from the Amadeus database (Bureau van Dijk). In general we follow the approach of S&A European Countries from the sample to preserve greater homogeneity across the EU sample. Unlike S&A Sampling Procedures Our procedures for randomly selecting a sample of firms is described in detail in Appendix 1. We follow S&A 11 sector. When using R&D intensity data we lose firms from service sector industries, focusing only on manufacturing industries. Estimating Productivity Measures To estimate total factor productivity, we take residuals from the estimated log-linear (Cobb-Douglas) production function in which value added (for firm i in year, t) is regressed on labour and capital stock inputs, where value added has been calculated as operating revenue minus material inputs. Labour inputs are measured by the firm's total wage bill, with capital stocks defined as tangible fixed assets. Sector-specific price indices from the EUKLEMS database have been used to transform nominal into real values, except for capital stocks for which we use a gross fixed capital formation deflator (from EUROSTAT National Accounts). In line with S&A Estimating Corporate Tax Effects Following Griffith et al. (3) where terms are as defined in equation 5 The Levinsohn and Petrin 12 Equation (3) allows for both a 'frontier effect' on firms' TFP levels as well as 'convergence or catch-up effect' and some persistence in TFP levels over time 8 . The interaction term Π s τ c t−1 captures the differences-in-differences impact of corporate taxes whereby firms in the more profitable industries are expected to have lower TFP when they are also in countries and/or years with high corporate tax rates. Note that the interaction component terms Π s and τ c,t−1 cannot be introduced separately while industry (s) and interactive country-year (ct) fixed effects are also included. However, as a robustness check we can investigate whether, omitting these fixed effects, the two interactive components display the expected signs (positive for profitability; negative for corporate tax rates). To estimate the impact of corporate taxes on productivity therefore requires data on industry-level profitability and country-time specific statutory corporate tax rates, as For each industry at the 2 digit ISIC level a profitability ratio is calculated from data on gross operating surplus divided by value added; this is applied to the whole period of our analysis, 1995-2008. We follow Furthermore, if we were to use an industry profitability measure differentiated by country there is increased risk that such a measure would reflect biases in reported profit. As S&A 8 In contrast to 13 report their profits (and/or over-report their deductions). This can be compounded if high statutory corporate taxes are positively related to other conditions that adversely affect firm profitability (e.g. where corporate tax regimes with high rates occur simultaneously with government regulatory or similar interventions that harm profitability), this would further bias any country-specific profitability measures. Taxes, the User Cost of Capital and Investment Since Jorgenson (1963) introduced the concept of the user cost of capital, , the relationship between this tax adjusted rental price and the dynamics of investment demand remains central in the empirical literature. Therefore, in the analysis of investment behaviour we have computed this concept as captured in equation The value of the standard depreciation allowance is given by the legal method provided by the tax system, normally one of the following: straight-line depreciation, constant declining balance depreciation or the method of the 'sum-of-the-years'-digits -see Appendix 2. In determining the value of the firm's discount rate we also follow King and Fullerton (1984). However, since our interest is restricted to the impact of the corporate tax, in determining the magnitude of this discount rate we discard the tax treatment of savings under personal income taxation. Therefore, for the case of debt finance we assume whereas if the 14 investment is financed using own resources the nominal discount rate coincides with the market interest rate, i.e. . 10 In generating the user cost of capital as a country-specific regressor in our estimations, equation (4) has been computed for 6 different investment types in each of the 16 countries included in the study for the period 1996-2008. By an investment type we mean the combination of two forms of finance -debt and equity -and three alternative general asset types -buildings, machinery and technology. As a result, for each year every country has six basic measures of the user cost of capital (3 assets 2 financial instruments). These basic measures of the cost of capital are weighted to be included in our estimations. The weighting procedure for the assets uses the shares of the real fixed capital stocks of buildings, machinery (the sum of transport equipment, other machinery and equipment, and other non-residential investment) and technology (Information and Communications Technologies, ICTs) based on the information provided in EU KLEMS growth and productivity accounts. The weighting procedure for forms of finance is based on the information from Morningstars on the market debt-to-capital ratio for more than 8.000 companies traded in US stock exchanges. This information has then been averaged by industry. Both the asset and form-of-financing weighting procedures are based on information for the US; that is, we assume again that industry-level technologies are similar across countries. In this way we also reduce the potential endogeneity between productivity and the user cost of capital, since more productive firms may have more access to loans and be more intensive in ICT use. By using US assets and form of financing shares, we also reduce the correlation between the user cost of capital and corporate tax rates if firms using more debt than equity tend to be found in countries with higher corporate tax rates. 10 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, for debt finance, for retained earnings and for new share issues, where is marginal tax rates for interest income, is the effective tax rate for capital gains and is the imputation rate in the case of dividend payments. The assumption of different discount rates depending on the form of finance has been subject to some criticisms however; see Scott (1987). 15 In computing equation Lammersen and Schwager, 2005). Summary of values for non-tax variables Economic depreciation rates ( ) Buildings (3.80%); Machinery (18.04%); Technology (43.10%