Published online by Cambridge University Press: 29 November 2018
This paper analyzes the effects of corporate tax liability on firm-level total factor productivity (TFP) as the key driver of economic performance. This is a new dimension in the UK productivity puzzle that has not attracted attention so far. We use 6559 manufacturing firms over 2004–2011 to investigate whether higher levels of corporate tax affect the productivity catch-up process by reducing after-tax earnings that could alternatively be used for productivity-enhancing investment, particularly focusing on R&D- and export-intensive firms. Our key results are summarized as follows: first, higher levels of corporate taxation impact adversely on TFP and this finding is robust to different tax measures and insensitive to endogeneity bias; second, as R&D- and export-intensive firms tend to have relatively higher TFP growth, higher levels of tax liability as a share of earnings before interest and taxes decelerate TFP growth of these firms.
The authors would like to thank the editor and the anonymous reviewers of this journal for their very constructive comments and suggestions on an earlier version of this paper. We are also thankful to David Kernohan and Dimitris Tsouknidis for their comments and discussions. We are solely responsible for any error that might yet remain.