Jens Arnold

Tax Policy for Economic Recovery and Growth

This paper identifies tax policy that both speeds recovery from the current economic crisis and contributes to long-run growth. This is a challenge because short-term recovery requires increases in demand while long-term growth requires increases in supply. As short-term tax concessions can be hard to reverse, this implies that policies to alleviate the crisis could compromise long-run growth. The analysis makes use of recent evidence on the impact of tax structure on economic growth to identify which growth-enhancing tax changes can also aid recovery, taking account of the need to protect those on low incomes.

Does Services Liberalization Benefit Manufacturing Firms? Evidence from the Czech Republic

While there is considerable empirical evidence on the impact of liberalizing trade in goods, the effects of services liberalization have not been empirically established. Using firm-level data from the Czech Republic for the period 1998-2003, this study examines the link between services sector reforms and the productivity of domestic firms in downstream manufacturing. Several aspects of services reform are considered and measured, namely, the increased presence of foreign providers, privatization, and enhanced competition. The manufacturing-services linkage is measured using information on the degree to which manufacturing firms in a particular industry rely on intermediate inputs from specific services sectors. The econometric results lead to two conclusions. First, the study finds that services policy matters for the productivity of manufacturing firms relying on services inputs. This finding is robust to several econometric specifications, including controlling for unobservable firm heterogeneity and for other aspects of openness. Second, it finds evidence that opening services sectors to foreign providers is a key channel through which services liberalization contributes to improved performance of downstream manufacturing sectors. This finding is robust to instrumenting for the extent of foreign presence in services industries. As most barriers to foreign investment today are not in goods but in services sectors, the findings may strengthen the argument for reform in this area.

Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia

This paper uses micro data from the Indonesian Census of Manufacturing to analyze the causal relationship between foreign ownership and plant productivity. To control for the possible endogeneity of the FDI decision, a difference-in-differences approach is combined with propensity score matching. An advantage of this method, which has not been previously applied in this context, is the ability to follow the timing of observed changes in productivity and other aspects of plant performance. The results suggest that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants outperform the control group in terms of productivity by 34 percentage points. The data also suggest that the rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports.

Services Reform and Manufacturing Performance: Evidence from India

The growth of Indias manufacturing sector since 1991 has been attributed mostly to trade liberalization and more permissive industrial licensing. This paper demonstrates the significant impact of a neglected factor: Indias policy reforms in services. The authors examine the link between those reforms and the productivity of manufacturing firms using panel data for about 4,000 Indian firms from1993 to 2005. They find that banking, telecommunications, insurance and transport reforms all had significant, positive effects on the productivity of manufacturing firms. Services reforms benefited both foreign and locally-owned manufacturing firms, but the effects on foreign firms tended to be stronger. A one-standard-deviation increase in the aggregate index of services liberalization resulted in a productivity increase of 11.7 percent for domestic firms and 13.2 percent for foreign enterprises.

Exports Versus FDI in German Manufacturing: Firm Performance and Participation in International Markets

This paper tests some of the predictions of recent advances in trade theory that have focused on different trade patterns of firms within the same sector. Helpman, Melitz and Yeaple (2005) develop a model in which innate productivity differences between firms determine the degree of international engagement of firms: The least productive firms produce for the domestic market, better performers engage in export activities, and the top firms establish foreign subsidiaries. Using German firm-level data from 1996 to 2002, we test this prediction using non-parametric methods, by examining the distribution functions of the three subsets of firms for stochastic dominance. Rather than just comparing first moments, this technique allows us to compare productivity over the entire distribution. Our results show robust support for the prediction from theory.

Taxation and Economic Growth

This paper investigates the design of tax structures to promote economic growth. It suggests a “tax and growth” ranking of taxes, confirming results from earlier literature but providing a more detailed disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption. The paper breaks new ground by using data on industrial sectors and individual firms to show how re-designing taxation within each of the broad tax categories could in some cases ensure sizeable efficiency gains. For example, reduced rates of corporate tax for small firms do not seem to enhance growth, and high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity. While the paper focuses on how taxes affect growth, it recognises that practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising. Fiscalite et croissance economique Ce document examine la meilleure elaboration du systeme fiscal afin de promouvoir la croissance economique. Il suggere une classification des impots selon le modele « fiscalite et croissance », venant etayer des resultats deja connus dans des publications anterieures, mais proposant une ventilation plus detaillee des differents impots. Il s’avere que les impots sur les societes grevent le plus la croissance, suivis par les impots sur le revenu des personnes physiques, et ensuite les impots sur la consommation. Les impots sur l’immobilier semblent les moins nocifs. Une reforme fiscale sans incidence sur les impots et orientee sur la croissance consisterait a transferer une partie de la base imposable des impots sur le revenu sur des impots moins generateurs de distorsion, comme les impots recurrents sur l’immobilier ou ceux sur la consommation. Ce document est innovant dans la mesure ou il utilise des donnees sur les secteurs industriels et les societes individuelles afin de demontrer que le fait d’elaborer une nouvelle fiscalite au sein d’une large categorie d’impots pourrait, dans certains cas, permettre un gain d’efficacite non negligeable. Par exemple, des taux reduits d’impots sur les societes pour les petites entreprises ne semble pas augmenter favoriser la croissance; de meme, des taux marginaux eleves d’impots sur les revenus des personnes physiques peut reduire la courbe de la productivite en reduisant l’activite entrepreneuriale. Alors que ce document est centre sur la maniere dont les impots affectent la croissance, il reconnait qu’une reforme fiscale pragmatique necessite un equilibre entre efficience, equite, simplicite et levee d’impots.

Do Tax Structures Affect Aggregate Economic Growth

Cet article etudie le lien entre la structure de la fiscalite et la croissance economique. L’analyse empirique inclut des indicateurs sur la repartition des taxes dans des equations de croissance pour un panel de 21 pays de l’OCDE, en prenant en compte l’accumulation du capital physique et du capital humain. Les resultats montrent que les impots sur le revenu sont en general associes avec une croissance plus faible que celle associee aux impots sur la consommation et sur le patrimoine. Plus precisement, nous etablissons un classement des instruments de taxation au regard de leur lien avec la croissance. Les impots sur le patrimoine, et particulierement les impots periodiques sur la propriete immobiliere, semblent etre les plus favorables a la croissance, suivies immediatement des impots sur la consommation. Les impots sur le revenu des individus semblent etre significativement moins favorables, et les impots sur le revenu des societes ont les effets les plus negatifs sur le PIB par tete. Ces resultats suggerent que les reformes augmentant les impots sur le patrimoine et la consommation au detriment de ceux sur les entreprises seraient susceptibles d’ameliorer les perspectives de croissance economique. L’article trouve egalement les signes d’une relation negative entre la progressivite des impots sur le revenu des individus et la croissance. Tous les resultats precedents sont robustes a differentes specifications, incluant le controle des autres determinants de la croissance economique et l’instrumentation des indicateurs de taxation.This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are accounted for. The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita. These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth. All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators.

The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks

This paper addresses the often neglected question of how macroeconomic risk is shared across and within economies, and identifies reforms that could contribute towards achieving more desirable risksharing outcomes. For risk-sharing across countries, the paper discusses possibilities for international insurance as well as shock-spreading and risk-mitigating policies. Within countries, it assesses the possibilities for individuals to protect their wealth, labour and capital income against various forms of macroeconomic risk and discusses the desirable boundaries between private and government-sponsored risk-sharing institutions. The paper then presents new empirical and model-based evidence about how the short-term impact of selected macroeconomic shocks (including financial crises) is shared across different groups of agents, and analyses how such distributional effects are shaped by differences in institutions. For example, individuals on low incomes, and especially young people, seem in general to lose most from adverse macroeconomic shocks. Also, it appears that across countries two broad types of institutions can be identified that facilitate risk sharing between high and low income earners, namely “social protection” and “reallocation-facilitating” institutions. Based on countries’ reliance on these types of institutions, four broad “models” of risk sharing are identified across the OECD and the BRIICS. Le partage du risque macroeconomique : Les perdants (et gagnants) des chocs macroeconomiques L’article analyse comment les risques macroeconomiques sont repartis au niveau international et individuel. Il propose des reformes qui pourraient contribuer a une meilleure redistribution de ces risques. Premierement, au niveau international, le papier analyse l’opportunite des dispositifs d’assurance ainsi que des politiques de partage et de reduction des risques macroeconomiques. Deuxiemement, au niveau individuel, l’article evalue comment les individus peuvent proteger leurs patrimoines et revenus du travail et du capital a l’encontre de differents chocs macroeconomiques. Il analyse les limites et roles souhaitables des dispositifs prives et publics de repartition des risques. Enfin, l’article modelise les effets de court terme de certains chocs macroeconomiques – dont les crises financieres – sur differents groupes d’individus et propose une nouvelle analyse empirique de l’impact des institutions sur la repartition des risques macroeconomiques. Les bas revenus, et en particulier les jeunes, semblent les groupes les plus affectes par les chocs macroeconomiques. Les institutions de protection sociale et elles favorisant les transitions apparaissent contribuer a la redistribution des risques entre niveau de revenus. Cette analyse permet d’identifier quatre grands modeles de repartition des risques parmi les pays de l’OCDE et du BRIICS.

Prudential Regulation and Competition in Financial Markets

This paper examines how a range of stability-oriented regulatory policies for banking and insurance are related to selected stability and competition outcomes in these sectors. Based on survey information on financial market regulation, policy indicators for eight areas of prudential banking regulation are constructed, in addition to indicators for the insurance sector. Despite incomplete information on some areas that turned out to be important in the context of the recent financial crisis, the indicators correlate well with different measures of financial stability, both during the recent crisis and beyond. Furthermore, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking and insurance. Regulation prudentielle et concurrence sur les marches financiers Cette etude examine le lien entre les politiques de regulation prudentielle des industries de la banque et de l’assurance et les resultats observes dans ces secteurs en termes de stabilite et de concurrence. Sur la base d’enquetes portant sur la regulation des marches financiers, des indicateurs sont construits pour evaluer les politiques touchant a huit segments differents de la regulation bancaire prudentielle, ainsi qu‘au secteur de l’assurance. En depit de lacunes dans le renseignement de certains segments de la regulation, lacunes prejudiciables dans le contexte recent de crise financiere, ces indicateurs presentent une correlation satisfaisante avec diverses mesures de stabilite financiere, a la fois dans ce contexte de crise et au-dela. En outre, les resultats ne confirment pas l’hypothese qu’il y aurait en general un arbitrage entre la regulation prudentielle et la concurrence dans les secteurs de la banque et de l’assurance.

Structural reforms and the benefits of the enlarged EU internal market: still much to be gained

In the light of recent calls for additional structural reforms in Europe, this article looks at the role that a reduction of remaining barriers for integration and competition in the EU internal market can play in this context. This article presents new estimates of the likely impact of product market reform on labour productivity in old and new EU member countries, with a particular focus on network industries, professional services and retail trade. These estimates reveal that labour productivity could be boosted by an average of 10% over a time horizon of 10 years, in reward for a reform agenda that would align the stringency of anti-competitive regulation in services sectors to European best practice across all countries.