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Impact of tax burden on regional productivity growth

Martin Eichler, BAK Basel Economics

July 4th, 2006, OECD, Paris

OECD Workshop: Effective Corporate Taxation

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Policy question: What are the drivers of regional growth?

What are the measures decision makers can choose to foster economic growth?

BAK research project: Understanding the relation between location factors and Policy and Regional Growth regional growth using empirical and econometric tools

Project Sponsors:

How relevant is policy for regional growth?

BAK Analytical Approach:1. Benchmarking: Comparing economic performance and location factors2. Analysis: Understanding the relationship between performance and location factors3. Policy: Advice on policy measures and possible trade-offs

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Growth of productivity per man hourSelected European countries 1980-2003

0%

1%

2%

3%

4%

5%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

DE

FK

IT

AT

CH

UK

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Growth of productivity per man hourVariation of German regions, 1980-2003

0%

1%

2%

3%

4%

5%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

D E

DE_M IN

DE_M AX

F K

IT

A T

C H

UK

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Growth of productivity per man hourVariation of UK regions, 1980-2003

0%

1%

2%

3%

4%

5%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

D E

DE_M IN

DE_M AX

F K

IT

A T

C H

UK

UK_M IN

UK_M AX

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Growth of productivity per man hourVariation in selected European countries, 1980-2003

0%

1%

2%

3%

4%

5%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

D E

DE_M IN

DE_M AX

F K

FK_M IN

FK_M AX

IT

IT_M IN

IT_M AX

A T

AT_M IN

AT_M AX

C H

CH_M IN

CH_M AX

UK

UK_M IN

UK_M AX

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DatabaseInternational Benchmarking Database

Economic Performance (1980-2005)

Indicators: GDPGross value addedEmploymentHours workedProductivity (hourly productivity and output per employee)

Measures: Gross and realLevel and growth (time series 1980 to 2005)In national currency and in common currencyTotal, per capita

Industries: 60 different industries(following NACE 2-digit level)

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Database International Benchmarking Database

Location Factors

Innovation: Expenditure on R&D* (1980-2003)University quality (Shanghai Index) (2003-2005)Number of higher education degrees* (tertiary degrees) (1990-2005)Education level of labour force* (secondary / tertiary) (1980-2003) Patents* (1990-2005)Bibliometric indicators* (1990-2005)Company start-ups* (1993-2003)

Taxation: Taxation of highly qualified employees (1980-2005)Taxation of companies (1980-2005)

Regulation: Regulation of product markets (1980-2003)Regulation of labour markets (1980-2003)

* Indicators by industries, directly or through subjects/technology fields.Some parts of database still in development.

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Database International Benchmarking Database

Location Factors

Accessibility: Global accessibility (1980-2003)Regional accessibility (1980-2003)

Labour costs: Wages costs (1980-2004)Unit labour costs (1980-2004)

Population: According to gender and different age cohorts (1980-2005)

Agglomeration: Agglomeration size Proximity to an agglomeration

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International Benchmarking Database 2006Regional coverage

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Database Estimation data

Data selection

Left hand variable: Productivity (GDP, employment) growth, annual (alternative: longer periods)

Transformations: LaggedMoving averagesDerivations from sample averageLevels or changes of location factors

Controls: Country dummies (country groups)Time dummiesGlobal and Structural (industry mix) EffectEconomic cycle

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GDP growth and taxation manpower: evidenceDistribution of GDP growth and tax burdens on income of highly qualified employees

0%

1%

2%

3%

4%

5%

6%

25% 30% 35% 40% 45% 50% 55% 60%

Source: BAK International Benchmarking Database 2006GDP growth (1995-2005 annual average) Taxation: income 100’000 €, single, level in 1995

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0%

1%

2%

3%

4%

5%

6%

10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

Source: BAK International Benchmarking Database 2006GDP growth (1995-2005 annual average) Taxation: company, standard investment, level in 1995

GDP growth and taxation companies: evidenceDistribution of GDP growth and tax burdens on company investments

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• Theory and observation (questionnaires) can tell which location factors are important …

• … but they do hardly tell the size of the impact on regional growth

• Econometric analysis based on the benchmarking database

- Basic equation:

Growthit = α0 + α1*Global Effectt + α2*Structural Effectit + β1*L1it-1 + β2*L2it-1 + … + εit

- Panel data estimation (random effects, fixed effects) with

i = 142 regions

t = 15 years (1990 – 2004)

several location factors (L)

Why does a region grow?Econometric analysis

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Econometric resultsCoefficients (annual productivity growth, 1990-2003)

Variable Variable definition coefficient prob. (βi=0)

Global Effect overall sample productivity growth + < 1%Structural Effect productivity growth for given industry mix + < 1%

Company Taxation 4 years moving average, relative to sample mean − < 5%Manpower Taxation 4 years moving average, relative to sample mean − < 1%

Labour Market Regulation 4 years moving average, relative to sample mean + < 1%Product Market Regulation 4 years moving average, relative to sample mean + < 1%

Innovation: Secondary Educ. difference, 4 years moving average + < 1%Innovation: Tertiary Educ. difference, 4 years moving average + < 10%Innovation: R&D Expen. difference, 4 years moving average + < 5%

Accessibility: Intercontinental difference, 10 years moving average + < 10%Accessibility: Interregional difference, 10 years moving average − < 1%Regional Spill Over time invariant − < 5%

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Impact of policy variables: taxationEstimated impact of taxation on productivity growth in selected regions

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Bruxell

esKøbe

nhav

nMün

chen

Frankfu

rtMad

ridPari

sDub

linMila

noWienBas

elZüri

chHels

inki

Stockh

olmLo

ndon

Glasgo

w

Taxation of companies Taxation of highly qualified employees

Source: BAK International Benchmarking Database 2005Impact on productivity growth, in %-points, cumulated 1990-2003

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Source: BAK International Benchmarking Database 2005Impact on productivity growth, cumulated 1990-2003(in %-points, max impact against min impact)

Structural Effect

Taxation of Companies

Innovation - secondary education

Innovation - tertiary education

Innovation - R&D expenditures

Spatial Spillover Effect

Regulation of Labour Markets

Taxation of highly qualified employees

Intercontinental Accessibility

Interregional Accessibility

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%

Impact of location factorsSample-distribution (regions), impact on productivity growth (1990-2003)

Coefficient negative

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Research agenda2006

• Regional coverageUS states

Increase regional coverage in Europe (France, Italy), Portugal and Greece

• Left hand side

Include labour market (hours worked, employment ratio, population)

Industry specific estimations

• Methods

Evaluation of system approach

• Right hand side

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Impact of location factorsEstimated impact of taxation on GDP growth in selected regions

Source: BAK International Benchmarking Database 2006Impact on GDP growth, in %-points, annual average 1990-2004

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

Zurich

DublinLondon

OsloVien

naBosto

nSan

Francis

coHels

inkiMad

ridPari

sBru

ssels

Copenhag

enAmste

rdam

Stockholm

MunichMila

nStuttg

art

taxation

taxation of highly qualified employees

taxation of companies

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-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

Impact of location factorsSample-distribution (regions), the annual impact on real GDP growth

Source: BAK International Benchmarking Database 2006Impact on GDP growth, annual average 1990-2004(in %-points, derivation from sample mean)

innovation – r&d

innovation – human capital

taxation – companies

taxation – highly-qualified employees

regulation – labour markets

regulation – product markets

structural effect

0-10 % 10-25 % 25-75 % 75-90 % 90-100 %

Median

percentiles

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Summary of resultsOECD workshop on corporate taxation, July 4th, 2006

• Research program on impact of location factors on economic growthRegional variation is large …

… and available location factors can only explain a part of the difference

Signs of location factors largely as expected from theory & significant

Strong country effects and time trend, industry mix has important influence

• Impact of taxation

Tax burdens exercise ceteris paribus a negative impact on economic growth

This result is confirmed by stability tests

Differences of the tax burden on the income of highly qualified employees explains more regional growth differences than company taxation,especially for productivity growth

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Research agendaOECD workshop on corporate taxation, July 4th, 2006

• Further research directionsRegional coverage

More specific on sources of growth (productivity, hours worked, employment ratio, population)

Advanced Methods (system estimation)

Add more location factors, especially varying between regions(regulation; fragmentation and decentralization; innovation; …)

Industry specific estimations

• Further research directions (taxation)

Test more different types of tax burdens

Influence on specific industries different?

Add more regions with different tax burdens