Paris Tax Workshop hosted by EU Tax Observatory

Speakers: İrem Güçeri (Blavatnik School of Government) & Sébastien Laffitte (THEMA & EUTO)

Dynamics of Financing Frictions for R&D by İrem Güçeri

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. Claiming the cash immediately comes at a cost; the rate at which the government pays cash to loss-making firms is significantly lower than a future deduction. Firms’ choices reveal financing frictions and unobserved productivity. 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.

This paper examines the incidence of a substantial and temporary corporate tax increase in France, targeting large firms with turnover above €250 million between 2011 and 2016. Using a difference-in-differences (DiD) framework and administrative data, we analyze the effects of this tax hike on prices, wages, employment and investment. We find evidence of significant pass-through to output prices. On the labor market, we observe reductions in the total wage bill driven by declines in employment, particularly for low-paid workers, with minimal impact on average wages. Investment also contracted, with treated firms reducing their assets by up to 10% after the second tax increase. We also observe increases in turnover and employment non-treated firms operating in the sectors the most exposed to the temporary tax. These findings highlight the heterogeneous effects of corporate taxes, emphasizing their impact not only on shareholders but also on workers and consumers. We then combine our estimates with a theoretical model to assess the incidence of the corporate income tax in general equilibrium.