Tax Policy and Firms’ Productivity in Emerging Economies: Evidence from Taiwan

This paper investigates the effect of tax policy on productivity in Taiwanese manufacturing firms for the period 2001 to 2008. We first adopt the dynamic random effect (RE) probit model to analyze the determinants of a firm’s decision as to whether or not to apply for tax credits. The results show that the causal effect from past tax credits usage to current tax credits usage exists across industries. Specifically, there is a persistence of tax credits usage for Taiwanese manufacturing firms. This study further employed a panel instrumental variable (IV) approach to control for endogeneity of tax credits and firm heterogeneity in determining firm productivity. It shows that tax credits have significantly positive effect on firm productivity. Moreover, this marginal effect of tax credits is particularly relevant for electronics firms’ productivity. The results indicate that there is a productivity-enhancing effect of tax credits, suggest that the tax policy can enhance firm’s technology in Taiwan. Paper Prepared for Presentation at the 18th International Conference on Computing in Economics and Finance, June 27-29, 2012, Prague, Czech Republic (Preliminary draft, please do not quote.)