IMF Working Papers

The Right Kind of Help? Tax Incentives for Staying Small

By Dora Benedek, Pragyan Deb, Borja Gracia, Sergejs Saksonovs, Anna Shabunina, Nina Budina

June 13, 2017

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Dora Benedek, Pragyan Deb, Borja Gracia, Sergejs Saksonovs, Anna Shabunina, and Nina Budina. The Right Kind of Help? Tax Incentives for Staying Small, (USA: International Monetary Fund, 2017) accessed September 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Some countries support smaller firms through tax incentives in an effort to stimulate job creation and startups, or alleviate specific distortions, such as financial constraints or high regulatory or tax compliance costs. In addition to fiscal costs, tax incentives that discriminate by firm size without specifically targeting R&D investment can create disincentives for firms to invest and grow, negatively affecting firm productivity and growth. This paper analyzes the relationship between size-related corporate income tax incentives and firm productivity and growth, controlling for other policy and firm-level factors, including product market regulation, financial constraints and innovation. Using firm level data from four European economies over 2001–13, we find evidence that size-related tax incentives that do not specifically target R&D investment can weigh on firm productivity and growth. These results suggest that when designing size-based tax incentives, it is important to address their potential disincentive effects, including by making them temporary and targeting young and innovative firms, and R&D investment explicitly.

Subject: Corporate income tax, Marginal effective tax rate, Production, Productivity, Tax incentives, Tax policy, Taxes, Total factor productivity

Keywords: Analysis firm, Corporate income tax, Debt-to-asset ratio, EMTR computation, Factory productivity growth, Firm, Firm level, Firm TFP, Global, Growth, Innovation activity, Leverage ratio, Marginal effective tax rate, Productivity, Size-based taxation, Structural reforms, Tax incentive, Tax incentives, Total factor productivity, WP

Publication Details

  • Pages:

    32

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/139

  • Stock No:

    WPIEA2017139

  • ISBN:

    9781484302552

  • ISSN:

    1018-5941

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