This paper investigates whether tax and regulatory incentives for micro-firms in Europe hinder economic growth and productivity. We motivate the analysis by Europe’s persistent productivity gap and the widespread use of policies favoring very small firms. While reduced tax rates and simplified regimes may ease entry, theory suggests they can also distort firm growth incentives. Using firm-level data from the EU-wide CompNet database, we construct a composite index of micro-firm tax incentive intensity across countries. We find a non-linear relationship between incentives and the share of micro-enterprises. Moderate support is associated with a lower prevalence of micro-firms, consistent with policies facilitating early growth. Beyond a threshold, however, stronger and more discontinuous incentives correlate with a higher and more persistent concentration of micro-firms, alongside weaker aggregate productivity growth. The results highlight trade-offs between supporting micro-entrepreneurship and fostering firm dynamism.

This paper studies whether size-dependent public support distorts firm growth. We focus on Korea’s SME policy framework, where eligibility for a wide range of tax incentives, fiscal subsidies, and regulation changes discontinuously at revenue thresholds. We provide the theoretical analysis in which firms may optimally restrain expansion to preserve preferential treatment, implying bunching at the threshold. Using Korean firm-level panel data during 2018-2023, we test these predictions by comparing the growth rate of firms close to the SME–MME threshold with those farther away. Firms near the cutoff exhibit a statistically significant reduction in revenue growth of about 1.0–2.7 percentage points, along with slower employment growth by 0.9-1.3 percentage points. The findings suggest that size-contingent support policies can unintentionally discourage firm expansion.

Why do eligible firms fail to claim tax benefits? This paper investigates the drivers of imperfect take-up by exploiting a threshold-based tax cut policy targeting small firms in China. Using nationally representative administrative data, we document that only 40 percent of eligible firms claim tax benefits. We then employ a fuzzy regression discontinuity design and find that claiming the benefits significantly increases small firms’ tax consulting costs, which act as a hidden “entry fee” discouraging policy participation. The analysis further rules out audit risk and administrative approval barriers as alternative mechanisms. Moreover, we show that for participating firms, the realized tax savings are substantial enough—net of the consulting costs—to promote investment. These results indicates that to design effective tax incentives, policymakers should explicitly account for compliance frictions and take-up costs.

In this paper, we calculate the excess profits of energy and fossil fuel companies in the EU during the energy crisis on 2022-2023. A windfall tax on these profits was adopted, which we find could have generated €73.8 billion, nearly three times the officially reported collection. We document evidence for an avoidance response by large multinationals shifting profits to jurisdictions where the windfall profits tax was not in force. Using Czech country-by-country reporting data, we calculate the potential revenue of a permanent extension of the excess profits tax under different scenarios.