Tax Policy and Firm Behavior Analysis

1. ESRC / HMRC International Conference on Tax Research and Analysis Tax policy and firm behaviour Research and implications

2. ESRC / HMRC International Conference on tax research and analysis Contents • current reforms to corporation tax and personal taxes • research recap: business creation reduced by corporation tax and by personal taxes for people on low wages • research preview: high corporation tax leads to slower growth in low-productivity firms • research predictions on current UK reforms: a few more start-up firms, higher growth in low-productivity firms • questions, comments and answers • note: not government policy (except ‘current reforms’ slide)

3. ESRC / HMRC International Conference on tax research and analysis Current reforms • corporation tax – cut from 28% to 23% by 2014 • income tax personal allowance – increased by £1,630 by 2012 • NICs • employer and employee rates increased 1% by previous Government • revenue returned through rise in thresholds, by this Government. • changes in CT reliefs • capital allowances rates reduced: main pool 20% to 18% • R&D tax credit for SMEs increased: 175% to 200% to 225% • Patent box: CT rate of 10% for patents • other changes: bank levy, changes to CFC, EIS / VCT & business rates

4. ESRC / HMRC International Conference on tax research and analysis Research recap: Business creation reduced by CT, & by tax on low wages Source: Kneller R., and McGowan, D., ‘Tax policy and firm entry and exit dynamics: evidence from OECD countries’, awaiting publication.

5. ESRC / HMRC International Conference on tax research and analysis Dr Kneller’s research part 2: low corporation tax leads to faster growth in low productivity firms • purpose – examine effect of corporation tax on productivity within an industrial sector in a country, e.g. French transport, Danish retail • approach – productivity measured as (roughly) ability to produce revenue after controlling for • asset values, and • number of employees • ‘productivity frontier’ defined as productivity level of firms that are more productive than 95% of peers • finding – low CT results in faster approach to productivity frontier among low productivity firms

6. ESRC / HMRC International Conference on tax research and analysis Research predictions for UK reforms: more start-ups; faster growth in low-productivity firms • corporation tax 5% cut in CT rate predicted to • raise rate of entry by 0.2% in profitable sectors - • which implies an upper bound of 3000 extra firms in equilibrium • result in faster convergence to frontier by low-productivity firms • personal tax 1% rise in employee NICs implies, overall, fewer start-ups • but actual results complex, due to changes in reliefs & thresholds • e.g. Mirrlees review’s view on how CT affects multinational decisions:

7. ESRC / HMRC International Conference on tax research and analysis Questions, comments & answers How does this research fit into our view on tax and firm behaviour? What will the overall effect of recent reforms be? What does this mean for policy?