This paper provides novel evidence on the relationship between corporate taxation and firm productivity measured by total factor productivity (TFP). Existing theoretical literature suggests several channels through which taxes can affect firm productivity. Nevertheless, empirical evidence is scarce. We investigate the relationship between corporate taxation and firm productivity - overall and across the distribution of firm productivity. We also analyze how different tax system characteristics affect the development of a firm’s productivity over time. Our findings suggest that a higher tax burden may drive the least productive firms out of the market and may decrease the probability of a firm moving up the productivity distribution over time.

We analyze the role of financing frictions for investment in R&D and innovation by building and estimating a structural investment model for privately-held, R&D-intensive companies -- a group for which reliable estimates of financing frictions have not been available in earlier papers. We use confidential administrative data from the UK to study the effect of a special policy that aims to address financing frictions and stimulate innovation. Profitable firms are offered tax super-deductions for R&D, while loss-makers are given a choice between taking a cash injection from the government immediately or when they become profitable in the future. We find that privately-held innovative firms face much higher costs of external finance than public firms and there are vast heterogeneities across different sub-groups of firms in their exposure and responses.

We develop a general equilibrium model to study how corporate tax avoidance affects firm policies and aggregate outcomes. Tax avoidance and investment are complementary inputs, leading the largest firms to engage in the most avoidance and face the lowest effective tax rates, consistent with the data. We find that tax avoidance significantly increases both the average firm size and concentration, disproportionately benefiting large firms. Tax avoidance also generates capital misallocation, lowering productive efficiency and welfare. We estimate the model to quantify the costs and benefits of tax avoidance and evaluate the equilibrium effects of changes to the statutory tax rate and costs of avoidance.

R&D tax subsidy schemes are prevalent policy tools to foster private sector R&D. Their key aim is to internalize positive knowledge externalities from private sector R&D. In this paper, we use rich accounting and patent data to establish that R&D tax incentives increase the private sector R&D of treated firms and induce knowledge flows to other entities in the economy. A significant fraction of these knowledge externalities, pertaining to around 50% of the overall knowledge spillover, is found to accrue at foreign firms. We offer a conceptual framework, which illustrates that our estimates imply that R&D tax subsidies decentrally set by national governments are inefficiently small from a global perspective, most likely by a significant margin. In additional analyses, we show that the identified positive cross-border knowledge externality outweighs negative cross-border effects related to the relocation of mobile R&D.