OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
How do Taxes Affect Investment and Productivity?
An Industry-Level Analysis of OECD Countries
This paper analyses how different tax policies can affect investment and productivity. To address this
question the paper uses industry-level data from a set of OECD countries and examines whether different
industries are affected differently by taxation. Investment is shown to respond negatively to an increase in
the corporate tax rate and a decrease in capital depreciation allowances through changes in the user cost of
capital. The analysis of potential links between taxes and productivity tests the hypothesis that taxes affect
productivity through different channels and that due to some salient industry characteristics some
industries are inherently more affected than others by certain taxes. The paper finds evidence that corporate
and top personal income taxes have a negative effect on productivity. In contrast, tax incentives for
research and development (R&D) are found to have a positive effect on productivity. These effects are
stronger in those industries that are inherently more profitable, have more entrepreneurial activity and are
more R&D intensive, respectively.
Keywords: user cost, total factor productivity, corporate and personal income taxation, investment
JEL:
H24: Public Economics / Taxation, Subsidies, and Revenue / Personal Income and Other Nonbusiness Taxes and Subsidies;
H30: Public Economics / Fiscal Policies and Behavior of Economic Agents / Fiscal Policies and Behavior of Economic Agents: General;
E22: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Investment; Capital; Intangible Capital; Capacity;
C23: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models;
H25: Public Economics / Taxation, Subsidies, and Revenue / Business Taxes and Subsidies
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