The tax system penalizes the growth of new and small businesses in the EU

Salvador, Barrios; Fotis, Delis; Mikel, Landabaso Working Paper The tax system penalizes the growth of new and small businesses in the EU JRC Working Papers on Taxation and Structural Reforms, No. 07/2024 Provided in Cooperation with: Joint Research Centre (JRC), European Commission Suggested Citation: Salvador, Barrios; Fotis, Delis; Mikel, Landabaso (2024) : The tax system penalizes the growth of new and small businesses in the EU, JRC Working Papers on Taxation and Structural Reforms, No. 07/2024, European Commission, Joint Research Centre (JRC), Seville This Version is available at: https://hdl.handle.net/10419/306593 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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JRC Working Papers on Taxation and Structural Reforms No 07/2024 The tax system penalizes the growth of new and small businesses in the EU This publication is a report by the Joint Research Centre (JRC), the European Commission’s science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The contents of this publication do not necessarily reflect the position or opinion of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication. For information on the methodology and quality underlying the data used in this publication for which the source is neither Eurostat nor other Commission services, users should contact the referenced source. 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How to cite this report: European Commission, Joint Research Centre, Barrios, S., Delis, F. and Landabaso Alvarez, M., The tax system penalizes the growth of new and small businesses in the EU, European Commission, Seville, 2024, JRC138855.. 1 Contents Abstract ....................................................................................................................................................................................................................................................................... 2 Acknowledgements .......................................................................................................................................................................................................................................... 3 Executive summary .......................................................................................................................................................................................................................................... 4 1 Introduction and policy context ................................................................................................................................................................................................... 5 2 Data and findings ..................................................................................................................................................................................................................................... 7 2.1 Effective taxation and firm size .................................................................................................................................................................................... 7 2.2 Effective taxation, firm size and firm growth ................................................................................................................................................... 9 3 The case of the 2015 corporate tax reform in Spain ......................................................................................................................................... 14 4 Summary and conclusion ............................................................................................................................................................................................................... 16 References ............................................................................................................................................................................................................................................................. 17 List of abbreviations and definitions ........................................................................................................................................................................................... 25 List of tables ........................................................................................................................................................................................................................................................ 26 List of figures ..................................................................................................................................................................................................................................................... 27 2 Abstract We provide evidence on the differences in the effective tax rate by firm size, highlighting that effective tax rates tend to follow a bump-shaped curve, increasing from micro to small firms and then decreasing for medium to large firms. Our analysis, based on microdata from several EU countries, shows that both corporate and labour taxation follow this pattern. Econometric analysis reveals that a 1% increase in effective corporate taxation results in a 2.6% decrease in firm turnover growth, with new firms and micro firms being particularly affected. The negative impact of corporate taxation on firm growth is much larger for new firms compared to older firms, and this is especially pronounced in Spain, where a 1% tax hike leads to a turnover growth decrease of 8%. Examining the 2015 Spanish corporate tax reduction for new firms, we find that the reform's overall positive impact was insignificant for micro firms, suggesting the need for more targeted policies considering firm size, age, and ownership. 3 Acknowledgements We are grateful for comments from Ana Agúndez, Lidia Brun Carrasco, Paolo Canfora, Fernando Hervás, Dimitris Kyriakou, Frank Neher, Giuseppe Piroli, Raffael Speitmann, Andrzej Stasio, Johan Stierna and Daniel Stoehlker. We are especially grateful to Andrea Papini for his help with the EUROMOD simulations. Authors Barrios Salvador Delis Fotis (corresponding author) Landabaso Mikel 4 Executive summary This study provides descriptive evidence on the differences in effective tax rates by firm size, focusing on corporate and labour taxation across nine EU countries: Belgium, Spain, France, Croatia, Italy, Poland, Portugal, Romania, and Slovakia. Further, it analyses the impact of effective corporate taxation on firm-level turnover growth using econometric analysis and examines a specific case of tax reform implemented in Spain. It offers an analytical framework to evaluate tax burdens specifically for new and micro firms. Policy Context Small businesses represent the largest share of total employment in the EU, playing a key role in promoting growth and innovation, especially during periods of deep and rapid structural and technological changes, such as the ongoing green and digital transitions. Governments often adopt preferential tax schemes to encourage new business creation, given that existing tax structures, particularly in EU countries characterized by high tax burdens, may hamper their development potential. Against this background, one could argue that policy reforms need to address the tax disadvantages faced by small firms to encourage growth and innovation. Yet, existing evidence suggests that the tax burden is unequally distributed depending on firm size. Recent studies have provided substantial evidence on the tax advantages of large multinational corporations, which exploit the loopholes of the international tax system, something SMEs cannot benefit from. Additionally, certain features of the tax system may inherently disadvantage small businesses relative to larger enterprises, such as the asymmetric treatment of profits and losses, a bias towards debt over equity, and higher comparative costs related to tax compliance. This environment raises questions about whether SMEs, particularly micro and small firms, are at a competitive disadvantage, as they often cannot employ the tax strategies available to larger multinationals due to their size and domestic focus. Over the past decade, discussions and policy initiatives have aimed at simplifying tax rules and reducing compliance costs for firms, especially SMEs. Despite reduced tax rates and incentives for micro and new firms, evidence on how these incentives affect their growth is limited. Analysis This paper provides evidence on how effective tax rates change depending on firm size and how corporate effective tax rates impact firms' growth. A composite effective tax rate, complementing corporate effective tax rates with social security contributions paid by employers used as proxy for labour taxes, is constructed and analysed descriptively. An econometric analysis of the impact of corporate effective tax rates on firm growth is conducted. To examine the policy implications, the study considers the specific case of the Spanish corporate tax reduction for new firms adopted in 2015, using an event analysis. Main Findings Our results suggest the existence of a bump-shaped curve in effective tax rates, where such rates tend to increase from micro to small firm size but then decrease for medium to large firms. This pattern holds when considering either corporate taxation alone or both corporate and labour taxation together. Our econometric analysis indicates that a 1% increase in effective corporate taxation leads to a 2.6% decrease in firm turnover growth on average. The negative impact is much larger for new firms (4.1%) and is especially pronounced in Spain, where a 1% tax hike leads to an 8% decrease in turnover growth for new firms, followed by Italy and Belgium, with a corresponding 5% decrease. Micro firms are the most sensitive to the corporate effective tax burden, particularly in Southern EU countries, including Spain, Italy, Portugal, and Romania. We consider more specifically the Spanish case given the adoption in 2015 of tax reforms aimed at supporting new firms through reduced corporate income tax rates. First, our descriptive findings indicate that micro and small firms have experienced a significant increase in their effective tax burden, especially after 2012 and despite the adoption of the 2015 reform. On the contrary, medium and large firms saw the same indicator remain relatively stable or experience a slight decline during the same period. We also analyse the impact of the 2015 reform using econometric analysis. Our results reveal that the impact of this reform was positive, albeit insignificant for micro firms, casting doubt on its effectiveness. Our findings highlight the importance of considering firm size, age, and ownership characteristics in evaluating the effects of relevant tax policy changes. 5 1 Introduction and policy context Recent studies have provided substantial evidence on the tax advantage of large multinational corporations, which, thanks to their global business organisation, allow them to minimise their tax burden by exploiting the loopholes inherent to the international tax system. Such an advantage is especially salient in the European Union (EU) context, where capital circulates freely while tax rules remain essentially national (see Tørsløv et al., 2023). Furthermore, certain features of the tax system may inherently disadvantage small businesses relative to larger enterprises, such as the asymmetric treatment of profits and losses, a bias towards debt over equity, and higher comparative costs related to tax compliance (see OECD, 2015; European Commission, 2022). To get a complete picture of the tax burden faced by small businesses and their possible disadvantage compared to large firms, it is necessary to also consider labour taxation, given that small businesses tend to be more labour intensive than large firms (see Kumar et al.,1999). Over the past decade, discussions and policy initiatives aimed at simplifying tax rules and reducing compliance costs for firms, especially SMEs (Small and Medium-sized Enterprises), have been ongoing in Europe. Initiatives such as the CCCTB (Common Consolidated Corporate Tax Base), BEFIT (Business in Europe: Framework for Income Taxation), and the recently proposed Head Office System (HOT) by the European Commission to promote SMEs´ cross-border activities are at the forefront. Additionally, there is heightened scrutiny over the tax burden on domestic firms compared to multinationals, primarily focusing on multinational tax avoidance and profit shifting. The OECD’s Base Erosion and Profit Shifting (BEPS) initiative, along with the June 2021 agreement by G7 finance ministers to establish a minimum global corporate tax rate of at least 15%, are among the key measures targeting these concerns. On 1 January 2024, new EU rules took effect, setting a minimum effective taxation rate of 15% for multinational companies active in EU Member States. These rules, unanimously agreed upon by Member States in 2022, mark the EU's implementation of the ‘Pillar 2' rules from the 2021 global deal on international tax reform. 1 This environment raises questions about whether SMEs (micro and small firms, in particular) are at a competitive disadvantage, as they often cannot employ the tax strategies available to larger multinationals due to their size and/or the domestic scope of their activity. Many countries offer small enterprises various forms of relief to mitigate these disadvantages. The corporate income tax burden varies significantly across Europe, with SME tax incentives less common than R&D tax incentives (Spengel et al., 2015). Typically, reduced tax rates are used to support SMEs, particularly micro corporations. Despite the incentives for micro and new firms, evidence on how these incentives affect their growth is limited. This paper provides evidence on how effective tax rates change depending on firm size and how corporate effective tax rates impact firms´ growth. The effective tax rate represents the tax burden effectively paid by firms, in contrast with statutory tax rates, which do not embed possible reductions in the taxes paid through specific tax rebates affecting the rate and/or the base. We construct a composite effective tax rate that complements the corporate tax burden with the inclusion of social security contributions paid by employers which are used as proxy for labour taxation. Our analysis covers nine EU countries: Belgium, Spain, France, Croatia, Italy, Poland, Portugal, Romania, and Slovakia. We use extensive corporate balance sheet data from the Orbis database, encompassing nearly 4 million firms, covering the years 2008-2019, and social security contributions data from the EUROMOD microsimulation model. 2 We find evidence for a bump-shaped pattern of both corporate and composite effective tax rates (ETRs) depending on firm size. While micro firms tend to face low corporate ETRs, they experience a sizable increase in their corporate tax burden when transitioning from micro to small size status. The composite ETRs reveal a different picture for Spain and Italy, with the tax burden faced by micro firms surpassing that faced by larger firms. We further use the firm-level variation in corporate ETRs to analyse their impact on firms´ growth by performing econometric estimations. We find that a 1% increase in corporate ETRs leads to a 2.6% decrease in firm growth, which is statistically significant. Our econometric analysis shows that the growth of micro and new firms is significantly and negatively impacted by the corporate tax burden they face, making them the most sensitive firm categories to this burden. This result is especially pronounced in Southern EU countries such as Spain, Italy, and Portugal, as well as in Romania. 1 See https://taxation-customs.ec.europa.eu/taxation-1/corporate-taxation/minimum-corporate-taxation_en 2 We are grateful to Andrea Papini for providing the Euromod data. 6 SMEs represent two third of EU employment and almost 57% of total value added generated by the non-financial business sector, see European Commission (2022). Their role is key in promoting growth and innovation, especially during a period of rapid economic transformation and technological change characterizing the ongoing green and digital transition. Yet, our evidence suggests that existing tax structures hamper their potential contribution to economic growth despite preferential tax systems implemented in many EU countries, particularly in the EU periphery. Against this background, one could argue that policy reforms need to address the tax disadvantage faced by small firms. We consider this question by analysing the specific case of the corporate tax reform implemented in Spain in 2015, which granted a special tax rebate to newly incorporated entities carrying out business activities, taxed at a rate of 15%, as opposed to the benchmark corporate tax rate of 30%. We find that while the corporate tax cut had a favourable impact on the growth of the targeted group, this impact remained insignificant for micro firms, indicating a limited effect of the policy reform. This could occur because the tax cut was not sufficient and/or because it did not offer a distinctive advantage over medium and large firms, given the general reduction in the corporate tax rate that took place at the same time, decreasing from 30% to 28% in 2015, and from 28% to 25% in 2016. The rest of the paper is organised as follows. Section 2 provides details on the data used and an analysis of the descriptive statistics and the econometric estimation assessing the impact of effective taxation on firms´ growth. Section 3 focuses on the analysis of the 2015 Spanish tax reform. 13 Figure 6. Impact of Corporate ETR on Firm growth of Micro Firms across Countries Sources: Authors´ econometric estimations 14 3 The case of the 2015 corporate tax reform in Spain As observed in the country analysis of new firms (Figure 5) and micro firms (Figure 6), the growth of corresponding Spanish firms appears to be significantly and negatively affected by the corporate tax burden in both cases. Analysing the annual trends of corporate ETRs, social security contribution rates (labour ETRs), and composite ETRs in Spain for different firm sizes (Figure 7), we identify that the relatively decreasing or stable patterns until 2012 across firm size give way to increasing patterns for corporate ETRs and social security contribution rates after 2012 for micro and small firms. During this period, the effective corporate tax rate for micro firms increased by 3.6% (+3.1% for small firms), and the effective labour tax rate increased by 13% (+6.9% for small firms). In contrast, the picture is rather stable for medium firms, and for large firms, the corporate ETRs show a declining trend after 2014. Figure 7. Annual Trend of Corporate ETR, Labour ETR and Composite ETR in Spain Sources: Orbis database, Eurostat and authors´ calculations Spanish tax law offers several incentives, including reduced tax rates for small and medium-sized firms based on their tax base, throughout our analysis period. There is a specific event for new firms: effective from 1 January 2015, newly incorporated entities carrying out business activities are taxed at a rate of 15% against a benchmark rate of 28% which was later reduced to 25%, regardless of the amount of the tax base. 8 This reduced corporate tax rate of 15% for new companies applies during the first two years in which they achieve profits. However, this special tax rate does not apply in certain cases, such as newly created companies that are part of or controlled by a group of companies. This setting is ideal for an event analysis in the form of a difference-in-difference model extended by an interaction term to assess the impact of a change in corporate effective tax rates on firm growth. We define an 'event' variable as 1 for years after and including 2015, indicating the post-policy period, and 0 for years before the policy. A 'treatment' variable 8 This incentive was effective from 1 January 2013, but with different thresholds. Newly incorporated entities engaged in business activities were taxed at a rate of 15% on the tax base up to EUR 300,000 and at a 20% rate on the tax base exceeding that amount. 15 is 1 for Spanish firms in their first two profitable years that are neither part of a domestic nor a multinational group, and 0 otherwise. These variables are interacted with the corporate effective tax rate to isolate the impact on the growth of new, independent Spanish firms relative to older firms and newly created firms that are part of a company group, before and after the policy change. The model specifically assesses how growth responses to effective tax rate changes differ for the treatment group in the post-event period compared to the baseline (control group before the event). In Figure 8 and Table 7, we observe the impact of such a policy on firm growth. The results support our initial findings that higher corporate ETRs negatively impact firm growth and help alleviate concerns about the endogeneity in our empirical analysis, but with nuanced insights specific to the context of new firms and policy changes in Spain. Specifically, the green line shows that for the control group, the negative impact of corporate ETRs on growth (-158.544 in the baseline coefficient in Table 7) becomes more pronounced after the policy change (indicated by the dotted green line and by the interaction term Event * Corporate ETR in Table 7). This suggests a broader negative effect of the tax rate on firm growth, intensifying post-policy. The positive slope for the treatment group suggests that the tax rate reduction had a favourable impact on the growth of the targeted group of new, non-multinational firms in Spain. However, when the treatment group is defined in the same way but includes only micro firms, the results are still positive but become insignificant (the coefficient for the triple interaction term Event * Treatment * Corporate ETR), indicating a rather doubtful outcome of the tax reduction for micro firms. This could happen because there was also a general reduction in the corporate income tax (CIT) rate from 30% to 28% in 2015 (and later to 25%), rendering the tax reduction for micro firms that belong to the treatment group (new and not part of a company group) not pronounced enough or not sufficiently protracted in time. Figure 8. Impact of Corporate ETR on Firm growth (the case of Spain) Sources: Authors´ econometric estimations 16 4 Summary and conclusion Small firms (including micro-firms and SMEs) are well-known drivers and pillars of economic growth and innovation. Small businesses are the largest employers (95% of total employment in the EU), and their role is key during periods of deep structural changes, such as the ongoing green and digital transition. However, small businesses face specific hurdles to their development, including on the tax side, which some countries try to address by granting specific tax advantages. In this paper, we calculate the effective tax rate paid by firms, which takes into account specific tax advantages given to firms, including those related to their status and size. We calculate these rates by firm-size category for a sample of EU countries, considering two specific taxes: corporate income taxes (CIT) and social security contributions paid by employers, which represent labour taxes. Further, we analyse the impact of effective corporate taxation on firm-level turnover growth using econometric analysis and examine a specific case of tax reform implemented in Spain. Our results reveal interesting patterns whereby the effective tax rates tend to follow a bell-shaped curve, increasing at first when going from micro to small firm sizes and then decreasing again when going from medium to large size companies. A similar pattern emerges when considering only the effective corporate tax rate or both effective corporate taxes and labour taxes together. This pattern has also been found in other geographical areas, as shown in Bachas et al. (2023), and is, in itself, not surprising. On the one hand, governments aim to favour entrepreneurship and usually grant tax breaks for new firms and/or small or very small firms, which can be progressively withdrawn after a given period of time or when the firm's activity reaches a certain level. On the other hand, very large firms may be able to minimize their tax burden through tax optimization, which can include cross-border operations and the use of tax loopholes through mechanisms such as debt shifting, transfer pricing, or the location of intangible assets (e.g., patents) in countries offering specific tax advantages. Tax optimization requires sufficient resources and specific natures of activity which are not available to small companies, as reported in the European Commission (2022). Our econometric analysis indicates that a 1% increase in effective corporate taxation leads to a 2.6% decrease in firm turnover growth on average. The negative impact is much larger for new firms (4.1%) and is especially pronounced in Spain, where a 1% tax hike leads to an 8% decrease in turnover growth for new firms, followed by Italy and Belgium, with a corresponding 5% decrease. Micro firms are the most sensitive to the corporate effective tax burden, particularly in Southern EU countries, including Spain, Italy, Portugal, and Romania. The bell-shaped curve of effective taxation means that micro and/or new firms may face specific disadvantages when aiming to expand their activity, which may require policy support. Yet, public interventions aimed at reducing such disadvantages are not necessarily successful, depending on their design. We illustrate this by considering the specific case of the corporate income tax reform adopted by Spain in 2015, which granted a reduced rate for newly incorporated entities. Although the tax reduction appeared significant at first glance, with a temporary reduction in the statutory tax rate from 30% to 15% while the general rate was reduced from 30% to 28% and 25% successively, our results indicate that while the reform was positive, its impact was not significant and failed to boost SMEs’ activity during the period considered. Complementary descriptive analysis suggests that, despite the specific tax break offered to newly created businesses, micro and small firms paid higher effective taxes than medium and large firms, and this tax disadvantage amplified over time. Our analysis highlights the importance of considering firm size, age, and ownership characteristics, together with the effective impact of specific tax schemes, in evaluating the impact of these types of policies. While many countries offer tax incentives to new and micro firms, these businesses remain significantly affected by the tax burden, which puts them at a disadvantage compared to large firms. 17 References Ackerberg, D. A., Caves, K. and Frazer, G. 2015. Identification properties of recent production function estimators. Econometrica, 83(6), 2411-2451. Bachas, P., Brockmeyer, A., Dom, R., and C. Semelet, 2023. Effective tax rates and firm size. CEPR Discussion Paper Series. DP 17985. Barrios, S., Nicodème, G., and Fuentes, A. J. S. 2018. Multi‐Factor Effective Corporate Taxation, Firms’ Mark‐ Ups and Tax Incidence: Evidence from OECD Countries. Fiscal Studies, 39(3), 417-453. Egger, P., S. Loretz, M. Pfaffermayr, and H. Winner, 2009. Firm-specific forward-looking effective tax rates. International Tax and Public Finance 16, 850-870. European Commission, 2022, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, European Innovation Council and SMEs Executive Agency, Di Legge, A., Ceccanti, D., Hortal Foronda, F. et al., Tax compliance costs for SMEs – An update and a complement – Final report, Publications Office of the European Union. Kumar, K., Rajan, R., & Zingales, L. 1999. What determines firm size? NBER Working Paper 7208, National Bureau of Economic Research. Lopez-Garcia, P., and S. Puente, 2012. What makes a high-growth firm? A dynamic probit analysis using Spanish firm-level data. Small Business Economics 39, 1029-1041. OECD 2015, Taxation of SMEs in OECD and G20 Countries, OECD Tax Policy Studies nº23, Organisation for Economic Cooperation and Development, Paris. Spengel, C., P. Hausemer, S. Bergner, R. Bräutigam, M.T. Evers, S. Plances, and F. Streif, 2015. SME Taxation in Europe - An Empirical Study of Applied Corporate Income Taxation for SMEs Compared to Large Enterprises. European Commission (CIP Programme), Mannheim. Tørsløv, T., Wier, L., and Zucman, G. 2023. The Missing Profits of Nations. Review of Economic Studies, Volume 90, Issue 3, May 2023, Pages 1499–1534, Zhou, H., and G. de Wit, 2009. Determinants and dimensions of firm growth. SCALES-initiative Scientific Analysis of Entrepreneurship and SMEs, EIM Research Reports. 18 Table 1. Variable definitions and sources Variable Definition Source A. Dependent variables Firm growth Firm operating revenue turnover growth calculated as follows: (turnover at t+1 - turnover at t) / turnover at t. Own estimations using Orbis B. Firm and firm size characteristics Corporate ETR Firm-level variable calculated using taxation data from Orbis, encompassing both current and deferred taxes. The calculation is performed by dividing taxation by profits and losses before taxes. Three distinct sets of corporate ETRs are defined: the first excludes negative taxation values (such as refunds) and loss-making firms; the second includes negative taxation values but excludes lossmaking firms; and the third includes both negative taxation values and loss-making firms. In all sets, the corporate ETR values are truncated to lie within the range of 0 to 1. Own estimations using Orbis Composite ETR It combines capital and labour tax burdens based on a production function, with weights for labour and capital varying by firm size, country, and year. The capital part uses the average corporate ETRs by country, firm size, and year, weighted by total EBITDA at the same level. The labour part uses social security contribution rates estimated from the EUROMOD model, weighted by total employee expenses at the country, firm size, and year level. Own estimations using Orbis and Euromod Total assets Firm total assets (log). Orbis Number of employees Firm number of employees (log). Orbis ROA Firm return on assets. Orbis Tangibility ratio Firm ratio of tangible to total assets. Orbis Leverage Firm leverage. Orbis Firm age Firm age based on the variable “incorporation date” in Orbis. Orbis Cash ratio Firm cash and cash equivalents divided by total assets. Orbis Newness Binary variable equals to 1 if a firm is no older than two years; 0 otherwise. Own estimations using Orbis Firm size Categorical variable for firm size, defined according to Eurostat's classification based on annual turnover. Own estimations using Orbis C. Country characteristics GDP per capita The natural logarithm of GDP per capita (current US$). World Bank GDP growth GDP growth (annual %) World Bank Inflation Inflation, consumer prices (annual %) World Bank Rule of Law Captures perceptions of the extent to which agents have confidence in and abide by the rules of society. World Governance Indicators 19 Table 2. Summary statistics The table reports the number of observations, the mean and standard deviation, minimum and maximum of the main variables in the analysis. The variables are defined in Table 1 and the sample period is 20082019. (1) (2) (3) (4) (6) Observations Mean Std. deviation Min Max Firm growth 14,570,208 60.70 198.3 -1 686 Operating revenue turnover 14,570,208 5,225,589 1.40e+08 1 6.24e+10 Corporate ETR 14,570,208 0.21 0.24 0 1 Total assets 14,570,208 12.83 2.01 0 26.05 Number of employees 14,570,208 1.57 1.31 0 13.19 ROA 14,570,208 -0.02 43.07 -148,738 4,173 Tangibility ratio 14,570,208 0.24 0.29 0 295.23 Leverage 14,570,208 0.96 111.07 -254.01 357,047 Cash ratio 14,570,208 0.16 0.57 -1,136 204.30 Firm age 14,570,208 14.16 12.19 0 814 GDP per capita 13,566,821 10.11 0.46 9.04 10.77 GDP growth 13,566,821 0.87 2.68 -7.19 8.20 Inflation 13,566,821 1.26 1.31 -1.16 6.21 Rule of Law 14,570,208 0.76 0.42 -0.02 1.55 Newness 14,570,208 0.12 0.33 0 1 Firm size 14,570,208 1.25 0.59 1 5 20 Table 3. OLS estimation of equation 1 The table reports coefficient estimates and standard errors (in parentheses) from the OLS estimation of equation (1). Dependent variable is Firm growth. The lower part of the table denotes the type of fixed effects. We cluster the standard errors at the firm level in all specifications. The ***, **, and * marks denote statistical significance at the 1%, 5%, and 10% level, respectively. (1) (2) (3) (4) Firm growth Firm growth Firm growth Firm growth Corporate ETR -147.491*** -176.989*** -147.206*** -157.725*** [43.471] [41.374] [43.463] [44.455] Total assets -160.830*** -183.108*** -158.700*** -160.935*** [46.012] [53.318] [46.651] [47.049] Number of employees -62.509** -72.523** -62.084** -60.758** [29.425] [33.280] [29.356] [29.428] ROA 0.011* 0.014* 0.011* 0.011* [0.006] [0.007] [0.006] [0.006] Tangibility ratio 33.412 42.083* 35.735 37.310* [21.947] [23.873] [22.747] [22.622] Leverage -0.011 -0.012 -0.010 -0.011 [0.007] [0.008] [0.007] [0.007] Firm age -4.694** -4.435 [2.045] [3.007] Cash ratio 17.616** 19.462** 17.975** 17.764** [8.552] [9.027] [8.715] [8.484] GDP per capita 65.991 [195.830] GDP growth 0.857 [2.769] Inflation -0.582 [7.691] Rule of Law 15.801 [104.326] Observations 14,570,208 13,566,821 14,570,208 14,570,208 Adjusted R-squared 0.395 0.391 0.395 0.395 Firm Y Y Y Y Country-year N N N Y Industry-year N N Y Y Standard errors Firm Firm Firm Firm 21 Table 4. Econometric estimation of Figures 3 and 4 The table reports coefficient estimates and standard errors (in parentheses) from the OLS estimation of the underlying regressions used to construct Figures 3 and 4. The dependent variable is Firm growth. The lower part of the table denotes the type of fixed effects. We cluster the standard errors at the firm level in all specifications. The ***, **, and * marks denote statistical significance at the 1%, 5%, and 10% levels, respectively. (1) (2) Firm growth Firm growth Corporate ETR -74.210*** -9.404 [16.268] [129.865] Newness 266.581*** [68.270] Newness * ETR -868.016*** [330.123] Micro 705.292*** [119.326] Micro * ETR -166.913** [84.117] Observations 14,570,208 14,399,859 Adjusted R-squared 0.395 0.198 Firm Controls Y Y Firm Y Y Country-year Y Y Standard errors Firm Firm 22 Table 5. Econometric estimation of Figure 5 The table reports coefficient estimates and standard errors (in parentheses) from the OLS estimation of the underlying regressions used to construct Figure 5. The dependent variable is Firm growth. The lower part of the table denotes the type of fixed effects. We cluster the standard errors at the firm level in all specifications. The ***, **, and * marks denote statistical significance at the 1%, 5%, and 10% levels, respectively. (1) Firm growth Corporate ETR 15.046*** [3.491] Belgium-Newness * ETR -49.316*** [15.484] Spain-Newness * ETR -258.999** [131.255] France-Newness * ETR -8,307.05 [11,929.001] Croatia-Newness * ETR -10.224 [28.523] Italy-Newness * ETR -2,058.714*** [598.597] Poland-Newness * ETR -61.821** [25.301] Portugal-Newness * ETR -584.818*** [188.582] Romania-Newness * ETR -369.682** [171.066] Slovakia-Newness * ETR -130.167 [99.967] Observations 14,570,208 Adjusted R-squared 0.395 Firm Controls Y Firm Y Country-year Y Standard errors Firm 29