## fmc2 ## Source details **Canonical URL:** [fmc2](https://www.imf.org/-/media/files/publications/fiscal-monitor/2017/april/pdf/fmc2.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2017/april/pdf/fmc2.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2017/april/pdf/fmc2.pdf.json) --- ### Introduction and policy context - A top challenge facing policymakers is how to raise productivity, the key driver of living standards over the long term. - In advanced economies, productivity growth was declining well before the global financial crisis, and the trend worsened in its aftermath. - The IMF’s policy agenda emphasizes the need to employ all policy levers, in particular to promote growth-friendly fiscal policies that will boost productivity and potential output (IMF 2016a). - Total factor productivity (TFP) at the country level reflects the productivity of individual firms, weighted by firm size; aggregate TFP depends on firms’ individual TFP and how available resources (labor and capital) are allocated across firms. - Resource misallocation—poor use of existing resources within countries—has been found to be an important source of differences in TFP levels across countries and over time. ### Definition and mechanisms of resource misallocation - Definition: the poor distribution of resources across firms, reducing the total output that can be obtained from existing capital and labor. - Mechanism: - When dispersion in revenue productivity across firms is wide, reallocating resources from low revenue-productivity firms to high revenue-productivity firms increases aggregate output without changing aggregate inputs. - In a well-functioning economy, firm size and firm productivity should be strongly positively correlated; distortions weaken this relationship. - Sources of distortions: - Government policies (poorly designed tax regimes, regulations, weak tax enforcement). - Ill functioning markets (underdeveloped financial markets). - Differential tax treatments across asset types or financing sources that bias investment toward tax-favored but possibly less productive assets. - Empirical examples: - Baily, Hulten, and Campbell (1992): 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to reallocation of factors across plants and to firm entry and exit. - Barnett and others (2014): labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007. ### How the tax system affects resource allocation — distortions and remedies - Identified tax-related distortions: - Differential tax treatment across assets (capital asset types). - Differential tax treatment across sources of financing (debt bias). - Differential treatment across firm characteristics (informality, size). - Policy implications and options: - Minimize differentiated tax treatments across assets and financing to avoid tilting firms’ investment and financing decisions toward tax-favored but less productive choices. - Consider adoption of a well-designed allowance for corporate equity (ACE) system or a cash flow tax (CFT) to eliminate debt-bias and financing distortions. - Strengthen tax administration to reduce the cost advantage of informal firms that underreport sales, especially in emerging market and low-income developing countries. - Reduce tax compliance costs to encourage growth among productive small firms; target tax relief to new firms rather than small firms broadly to avoid the “small business trap.” - Caveats: - Eliminating differences in tax treatment across firms may not always be feasible or desirable if tax policy is used to address externalities (for example, underinvestment in research or excessive carbon emissions). - Tax reform priorities must balance productivity impacts with other objectives, including income distribution and revenue mobilization. ### Measurement approach and data - Methodology: - Follows Hsieh and Klenow (2009) to measure potential TFP gains from reducing resource misallocation. - Key model assumptions: monopolistic competition with CES aggregator, identical industry production technology across countries, and firm-specific input/output distortions. - Distortions inferred from dispersion in firm revenue productivities across narrowly defined industries; resource allocation efficiency = actual industry TFP (with distortions) / efficient industry TFP (without distortions); TFP gains = inverse of resource allocation efficiency. - Data: - Advanced economies: ORBIS firm-level data used to estimate efficiency in 73 manufacturing industries and 76 services industries (four-digit NAICS) in nine countries over 2006–13. - Emerging market and low-income developing countries: World Bank Enterprise Surveys used to estimate efficiency in 18 manufacturing industries (two-digit ISIC) in 54 countries. - Data limitations: Germany, Japan, the United Kingdom, and the United States not included in ORBIS sample; unconsolidated statements used where available. ### Main quantitative findings — potential gains and growth effects - Potential macro gains: - Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. - Payoffs are higher for emerging market and low-income developing countries than for advanced economies, with considerable variation across countries. - Reforms will have winners and losers; transitions need careful management. - Cross-country Hsieh and Klenow (2009) referenced estimates: - If dispersion of firm revenue productivities in China and India were reduced to U.S. levels, TFP would increase by 30 to 50 percent in China and by 40 to 60 percent in India. - Fully equalizing revenue productivities across firms could boost aggregate manufacturing TFP by 86 to 115 percent in China, 100 to 128 percent in India, and 30 to 43 percent in the United States. - Resource-allocation efficiency measures: - Measured resource allocation efficiency is well below 100 percent in all country groups. - Moving to the efficiency level of a top performer (90th percentile) — Manufacturing sector (median): - Advanced economies: 16 percent. - Emerging market economies: 30 percent (median); 52 percent (75th percentile). - Low-income developing countries: 20 percent (median); 58 percent (75th percentile). - Services sector: - Advanced economies: 23 percent (median). - Estimated transitional real GDP growth effects over a 20-year transition to a top performer: - Advanced economies: higher annual real GDP growth rate of 0.7 percent. - Emerging market economies: higher annual real GDP growth rate of 1.3 percent. - Low-income developing countries: higher annual real GDP growth rate of 0.9 percent. - Estimates assume manufacturing TFP gains could be similarly achieved across other sectors and that there are no adjustment costs; estimates are limited to first-round effects and exclude feedback from greater aggregate investment. ### Channels generating misallocation and EMTR variation - Identified culprits: - Legislated provisions varying by firm characteristics (tax incentives by size/location, tariffs, employment protection, product market regulations). - Discretionary provisions favoring specific firms (subsidies, selective enforcement, preferential loans due to corruption). - Market imperfections (monopoly power, incomplete financial markets). - Effective Marginal Tax Rates (EMTRs): - EMTR on capital income measures an investor’s tax burden on returns over an investment’s lifetime as implied by corporate tax code provisions. - EMTR variation arises across: - Capital asset types (differences between tax depreciation and economic depreciation). - Financing sources (deductibility of interest vs returns to equity). - When EMTRs differ across assets/financing, firms in the same industry face firm-specific effective tax rates leading to within-industry misallocation. ### Tax disparity across asset types — empirical magnitudes - Tax disparity measured as EMTR on machinery minus EMTR on buildings: - Is above zero in half the countries in the sample and sizable for some EMEs and LIDCs. - For developing countries, higher tax disparity (EMTR_machinery > EMTR_buildings) associates with a lower share of machinery. - Estimated effects of eliminating tax disparity in manufacturing (machinery-intensive industries): - Raise resource allocation efficiency by 7¼ percentage points in emerging market economies. - Raise resource allocation efficiency by 5½ percentage points in low-income developing countries. - Advanced-economy corroboration: - United States (Liu 2011): differences in EMTRs by asset type cause underinvestment in computing and electronic equipment by about 25 percent and overinvestment in machinery and transportation equipment by about 18 percent. - For 11 advanced economies (Fatica 2013): differential taxation leads on average to underinvestment in ICT capital and overinvestment in other machinery and equipment. ### Corporate debt bias and financing distortions — magnitudes and risks - Corporate debt bias: interest expenses deductible while returns to equity are not; measured as EMTR on equity minus EMTR on debt. - Empirical results for nine advanced economies: - A 1 percentage point reduction in debt bias is associated with a 0.01 percentage point increase in resource allocation efficiency in R&D‑intensive industries (column (3) result). - Reducing debt bias to the 10th percentile (29 percentage points) would raise resource allocation efficiency in R&D‑intensive industries by 3 percentage points for the median advanced economy. - Using equity dependence as interaction: a 1 percentage point reduction in debt bias is associated with a 0.02 percentage point increase in efficiency; reducing debt bias to the 10th percentile would increase efficiency by 3 percentage points (median advanced economy). - Debt bias also contributes to excessive private sector leverage, posing a stability risk. ### Policy options to remove financing distortions - Allowance for Corporate Equity (ACE): - Deduction for an imputed return on equity so that investments earning a “normal” return are exempt from taxation. - By allowing deduction for both interest and the normal return on equity, ACE neutralizes choice between debt and equity. - ACE systems implemented in Belgium, Cyprus, Italy, and Turkey. - Require careful design to mitigate potential revenue loss from narrowing the tax base. - Cash Flow Tax (CFT): - Tax on money entering the business less money leaving the business; immediate expensing of all investment expenditures (100 percent first-year depreciation allowances) and no deductibility of interest or dividends. - Properly designed, CFT does not affect the decision to invest or discriminate across financing sources. - No country has adopted a comprehensive business CFT; transition complexities are likely reasons. - United States is considering a destination-based form of a cash flow tax with distinct cross-country spillover issues. ### Informality, tax compliance, and productivity — key estimates - Informal firms gain a cost advantage via tax evasion and regulatory circumvention, allowing lower-productivity firms to persist. - Firm-level evidence (manufacturing in EMEs and LIDCs): - Cheats reporting only 30 percent of sales (25th percentile of cheats) have a 4 percent lower TFP than tax-compliant firms. - Cross-country evidence: - For 130 developing countries, a higher corporate tax rate increases prevalence of cheats among small manufacturing firms (lowering reported sales), but effective and efficient revenue administration diminishes this effect. - Median tax administration cost across the sample is 1 percent of revenue (used in analysis). - Colombia 2012 payroll tax reform case study: - Before reform, nonwage labor costs were 60.3 percent of average wage. - Reform reduced payroll taxes by 13.5 percentage points, implying a 22.4 percent fall in the payroll tax. - Postreform, informality in 13 main metropolitan areas fell by 6½ percentage points to 51 percent (four years after reform), with part attributed to the reform. - Empirical estimates: reform increased formal jobs by between 3.1 and 3.4 percent (selected studies) and increased wages by between 1.9 and 4.4 percent; other estimates indicate employment increased by between 3.4 and 7.4 percent and informality fell by between 1.4 and 4.2 percent in alternative studies. - Payroll contribution breakdown (Prereform → Postreform, percent of wage rate): - Total: 60.3 → 46.8 - Pensions: 16.0 → 16.0 (Employer 12.0 → 12.0; Employee 4.0 → 4.0) - Health Care: 12.5 → 4.0 (Employer 8.5 → . . .; Employee 4.0 → 4.0) - Professional Risks: 2.0 → 2.0 - Other Payroll Contributions: 9.0 → 4.0 (Training (SENA) 2.0 → . . .; In-Kind Transfers (ICBF) 3.0 → . . .; Compensation Funds 4.0 → 4.0) - Paid Vacations: 4.2 → 4.2 - Severance Pay: 8.3 → 8.3 - Mandatory Bonuses: 8.3 → 8.3 - Employer total: 52.3 → 38.8 - Employee total: 8.0 → 8.0 ### Strengthening tax administration — measures and effects - Policy measures: - Ensure taxpayer registration, awareness of obligations, and accurate reporting. - Taxpayer segmentation by size to tailor services and enforcement. - Risk-based audit programs with well-trained auditors. - Integration of tax and customs agencies to strengthen enforcement. - Semiautonomous revenue agencies can help but international experience is mixed. - Empirical links: - TAQI (Tax Administration Quality Index) evidence: - TAQI constructed from 33 TADAT dimensions on a 0–4 scale; higher score = lower compliance costs. - Small firms (fewer than 20 employees) and young firms (younger than seven years) in countries with higher TAQI scores show higher labor productivity. - Small_i × TAQI_k: 0.563*** (Col 1); 0.508*** (Col 2). - Young_i × TAQI_k: 0.190*** (Col 4); 0.158** (Col 5). - Magnitudes: every one unit increase in TAQI implies labor productivity is 51 percent higher for small firms and 16 percent higher for young firms (from specified specifications). - Firm-level DID regressions show stronger tax administration mitigates the effect of higher CIT on underreporting by small firms: - CIT_k × Small Firm_i coefficients vary by tax-administration feature; interaction terms (CIT × TaxAdmin × Small Firm) often positive and significant (example: CIT × Tax Administration Cost × Small Firm_i: 0.0714***). ### Preferential tax treatment by firm size — small business trap evidence - Size-based preferential tax rates can create incentives for more productive firms to remain small to retain preferences, preventing growth. - Empirical findings for 54 EMEs and LIDCs: - In industries with a high share of small firms, resource allocation efficiency is lower by 1½ percentage points in countries providing lower tax rates for small firms. - Annex regression coefficients: Lower Tax for Small Firms Dummy × Share of Small Firms: - Column (1): –1.193** - Column (2): –1.587** - Policy guidance: prefer targeting tax relief to new firms rather than to all small firms, include safeguards against abuse, and reduce compliance costs to encourage growth. ### Limitations of the misallocation framework and extensions - Caveats of Hsieh and Klenow (2009): - Quantifies misallocation only within sectors, not across sectors. - May overestimate gains due to measurement error or model misspecification. - Static framework: does not capture dynamic entry/exit and productivity shifts over time. - Mitigations/related evidence: - Estimating relative to a top performer mitigates overestimation concerns. - Dabla-Norris and others (2015) show TFP gains from improving factor allocation across sectors average about 9 percent for selected AEs. - Recent research explores dynamic implications (Bento and Restuccia 2016; Haltiwanger 2016; Decker and others 2016), not fully considered here due to data constraints. - Transition and adjustment costs: - TFP gain estimates do not account for adjustment costs; reallocations create winners and losers requiring careful management. ### International tax treatment, antiavoidance measures, and investment effects - Multinationals often enjoy lower tax burdens via profit shifting (example: Finke (2013) finds 2007 German multinationals paid 27 percent less in taxes than a control group of domestic firms). - Transfer-pricing regulations (TPRs) and thin-capitalization rules aim to raise revenue and curb unfair competition but can reduce multinationals’ investment: - New analysis for 27 advanced economies: introduction of TPRs leads multinational affiliates to reduce investment as a share of fixed assets by 1 to 3 percentage points on average. - Given multinational affiliates invest about 30 cents per dollar of fixed assets, this implies a 3–5 percent reduction in their investment in response to TPRs. - Negative investment impact concentrated in large, more complex multinationals and smaller for those with higher shares of intangible assets. - Policy implication: international coordination in antiavoidance legislation is important; revenues from antiavoidance measures should help finance productivity-enhancing public investment. ### Conclusions — aggregate implications and reform priorities - Resource misallocation depresses productivity via wide dispersion in firm productivity even within narrow industries; some firms approach world frontier indicating catch-up potential. - Aggregate gains: - TFP gains from reducing resource misallocation could add roughly 1 percentage point to annual real GDP growth (sample of 54 developing countries and 9 advanced economies). - Payoffs are higher for EMEs and LIDCs than for AEs, with variation across countries. - Key reform priorities: - Upgrade tax system design so firm decisions are driven by business reasons, not tax reasons. - Minimize differentiated tax treatment across assets and financing; consider well-designed ACE systems or cash flow taxes to address distortions. - Level the playing field across firms: - Reduce compliance costs (for example, easy filing). - Promote compliance via registration, taxpayer awareness, and accurate reporting. - Adopt risk-based tax administration with strong audit capacity and taxpayer segmentation. - Target tax relief to new firms rather than small firms to avoid “small business trap.” - Broader considerations: - Tax reform priorities must account for income distribution and revenue mobilization needs. - Complement tax reforms with structural reforms (financial, labor, product market) and supportive macroeconomic policies. - Any transition requires careful management because reallocations create winners and losers. *International Monetary Fund | April 2017 — Chapter: Upgrading the Tax System to Boost Productivity (Introduction)* ### Introduction ### fmc2 - Introduction ### Introduction and policy context - A top challenge facing policymakers is how to raise productivity, the key driver of living standards over the long term. - In advanced economies, productivity growth was declining well before the global financial crisis, and the trend worsened in its aftermath (Figure 2.1). A slowdown in productivity has also taken place in developing countries since the crisis, hampering their convergence toward higher income levels. - The IMF’s policy agenda emphasizes the need to employ all policy levers, in particular to promote growth-friendly fiscal policies that will boost productivity and potential output (IMF 2016a). - Total factor productivity (TFP) at the country level reflects the productivity of individual firms, weighted by firm size; aggregate TFP depends on firms’ individual TFP and how available resources (labor and capital) are allocated across firms. - Resource misallocation—poor use of existing resources within countries—has been found to be an important source of differences in TFP levels across countries and over time. ### What is resource misallocation? - Definition: the poor distribution of resources across firms, reducing the total output that can be obtained from existing capital and labor. - In a well-functioning economy, firm size and firm productivity should be strongly positively correlated; distortions weaken this relationship. - Sources of distortions: - Government policies (poorly designed tax regimes, regulations, weak tax enforcement). - Ill functioning markets (underdeveloped financial markets). - Differential tax treatments across asset types or financing sources that bias investment toward tax-favored but possibly less productive assets. - Mechanism: when dispersion in revenue productivity across firms is wide, reallocating resources from low revenue-productivity firms to high revenue-productivity firms increases aggregate output without changing aggregate inputs. - Example evidence: - Baily, Hulten, and Campbell (1992) find that 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to reallocation of factors across plants and to firm entry and exit. - Barnett and others (2014) find that labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007. ### How the tax system affects resource allocation - The chapter argues that upgrading the design of the tax system is key to boosting productivity by reducing distortions that prevent resources from going to their most productive uses. - Tax-related distortions identified: - Differential tax treatment across assets (capital asset types). - Differential tax treatment across sources of financing (debt bias). - Differential treatment across firm characteristics (informality, size). - Policy implications: - Governments should seek to minimize differentiated tax treatments across assets and financing to avoid tilting firms’ investment and financing decisions toward tax-favored but less productive choices. - Adopting a well-designed allowance for corporate equity (ACE) system or a cash flow tax can eliminate debt-bias and financing distortions. - Leveling the playing field across firms encourages growth of productive firms: - In emerging market and low-income developing countries, stronger tax administration can reduce the cost advantage of informal firms that underreport sales. - Reduce tax compliance costs to encourage growth among small firms and target tax relief to new rather than small firms to avoid the “small business trap.” - Caveats: - Eliminating differences in tax treatment across firms may not always be feasible or desirable (tax policy can intentionally influence resource allocation to address externalities such as underinvestment in research or excessive carbon emissions). - Tax reform priorities must balance productivity impacts with other objectives, including income distribution and revenue mobilization. ### Measuring resource misallocation and potential gains - Methodology: - The chapter follows the framework proposed by Hsieh and Klenow (2009) to measure potential TFP gains from reducing resource misallocation (see Annex 2.1). - The Hsieh and Klenow (2009) model assumptions: 1. a monopolistic competition setting in which each producer makes a distinct variety of a good, with varieties aggregated via a constant elasticity of substitution aggregator, 2. a specific production technology for each industry that is identical across countries, 3. the presence of firm-specific input and output distortions. - Distortions are inferred from dispersion in firm revenue productivities across narrowly defined industries; resource allocation efficiency is calculated as the industry’s actual TFP (with distortions) divided by the industry’s efficient TFP (without distortions). TFP gains are calculated as the inverse of resource allocation efficiency. - Data: - For advanced economies: firm-level data from ORBIS used to estimate resource allocation efficiency in 73 manufacturing industries and 76 services industries (at the four-digit NAICS industry level) in nine countries over the period 2006–13. - For emerging market economies and low-income developing countries: firm-level data from the World Bank Enterprise Surveys used to estimate resource allocation efficiency in 18 manufacturing industries (at the two-digit ISIC industry level) in 54 countries. - Notes on data limitations: Germany, Japan, the United Kingdom, and the United States are not included in the ORBIS sample owing to data constraints; unconsolidated statements are used where available. ### Main quantitative findings - Potential macro gains: - Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. - Payoffs are higher for emerging market and low-income developing countries than for advanced economies, with considerable variation across countries. - Reforms to tackle resource misallocation will have winners and losers; transitions need to be carefully managed. - Cross-country estimates from Hsieh and Klenow (2009) referenced: - If dispersion of firm revenue productivities in China and India were reduced to levels observed in the United States, TFP would increase by 30 to 50 percent in China and by 40 to 60 percent in India. - Hsieh and Klenow (2009) also estimate that fully equalizing revenue productivities across firms would boost aggregate manufacturing TFP by 86 to 115 percent in China, 100 to 128 percent in India, and 30 to 43 percent in the United States. - Empirical pattern: - A less efficient country displays some firms with high revenue productivity but many more firms with low revenue productivity compared with a more efficient country; higher dispersion in revenue productivities across firms reveals resources are not going to where they are most productive (Figure 2.2). ### Policy recommendations (summary) - Upgrade tax design to reduce distortions that promote survival or expansion of inefficient firms and that bias investment/financing toward less productive choices. - Minimize differential tax treatments across assets and financing (consider ACE or cash flow tax to remove debt bias). - Strengthen tax administration to reduce unfair advantages of informality, especially in emerging and low-income developing countries. - Reduce tax compliance costs to encourage growth among productive small firms; target tax relief to new firms rather than simply to small firms to avoid lock-in effects. - Complement tax reforms with structural reforms (financial, labor, product market reforms) and supportive macroeconomic policies to maximize payoffs. - Take into account other policy objectives—income distribution and revenue needs—when prioritizing tax reforms aimed at raising productivity. *International Monetary Fund | April 2017 — Chapter: Upgrading the Tax System to Boost Productivity (Introduction)* ### CHAPTER 2 UpGRAdING THE TAx SySTEM TO BOOST pROdUCTIVITy ### CHAPTER 2 UpGRAdING THE TAx SySTEM TO BOOST pROdUCTIVITy ### Resource allocation efficiency across countries and sectors - Measured resource allocation efficiency is well below 100 percent in all country groups, indicating ample room to increase efficiency. - Dispersion of firm revenue productivities within narrowly defined industries is much tighter in more efficient countries; less efficient countries can reap substantial gains by reallocating resources from lower-revenue-productivity firms to higher-revenue-productivity firms. - A top performer is defined as a country at the 90th percentile of the sample distribution of resource allocation efficiency. ### Potential TFP gains from removing within-sector distortions - Estimated TFP gains from fully equalizing revenue productivity across firms are substantial but may overstate gains because of measurement error and omitted factors (for example adjustment costs and price markup variation). - To control for possible biases, TFP gains are also measured relative to moving to the efficiency level of a top performer (a country at the 90th percentile). - Manufacturing sector (moving to top performer): - Advanced economies: 16 percent at the median. - Emerging market economies: 30 percent at the median; 52 percent at the 75th percentile of the distribution. - Low-income developing countries: 20 percent at the median; 58 percent at the 75th percentile of the distribution. - Services sector: - Advanced economies: 23 percent at the median. - Note: These estimates follow Hsieh and Klenow (2009) methodology; samples use ORBIS for AEs and World Bank, Enterprise Surveys (WBES) for EMEs and LIDCs. The figure uses 2013 data for AEs and the latest available data for EMEs and LIDCs. ### Estimated transitional real GDP growth effects from reducing misallocation - Assuming a transition path of 20 years and moving to the efficiency level experienced by a top performer: - Advanced economies: higher annual real GDP growth rate of 0.7 percent. - Emerging market economies: higher annual real GDP growth rate of 1.3 percent. - Low-income developing countries: higher annual real GDP growth rate of 0.9 percent. - These estimates are for the median country in each country group and assume that estimated TFP gains in manufacturing could be similarly achieved across other sectors and that there are no adjustment costs. Estimates are limited to first-round effects and do not include feedback from greater aggregate investment. ### Channels generating resource misallocation and the role of taxation - Identified culprits include: - Legislated provisions that vary by firm characteristics (for example tax incentives that depend on size or location, tariffs applied to particular goods, employment protection measures, and product market regulations that limit market access). - Discretionary government provisions that favor specific firms (for example, subsidies, selective tax enforcement, and preferential loans granted because of corruption). - Market imperfections (for example, monopoly power and incomplete financial markets). - Tax policy and tax administration are important factors to consider when tackling productivity challenges; specific design of tax policies can result in differentiated tax treatments across firms. - Heterogeneous firms facing the same statutory tax rules can nonetheless face firm-specific tax rates when there are differences in taxation by asset type, source of financing, or firm characteristics. ### Effective marginal tax rates (EMTRs) and firm-level variation - The effective marginal tax rate (EMTR) on capital income measures an investor’s tax burden on the returns from an investment. - If EMTRs are identical across assets, financing, and firm characteristics, all firms in a given industry face the same tax rate. When EMTRs differ, tax rates vary across firms even within narrowly defined industries because of differences in asset composition, sources of financing, ownership structure, and profitability. - The chapter tests whether resource allocation efficiency is lower in countries with higher tax distortions using a difference-in-differences approach (Rajan and Zingales 1998). The empirical strategy exploits that certain industries are intrinsically more exposed to specific tax distortions (for example, machinery-intensive industries versus building-intensive industries). ### Disparities in EMTRs across capital asset types and evidence - EMTRs vary across asset types because of differences between tax depreciation and economic depreciation. - A wider disparity in EMTRs across asset types can result in over- or underinvestment in particular capital asset types. - Tax disparity (measured as EMTR on machinery minus EMTR on buildings): - Is above zero in half the countries in the sample, regardless of country group, and is sizable for some emerging market economies and low-income developing countries. - For developing countries, those with high tax disparity (higher EMTR for machinery than for buildings) tend to have a lower share of machinery compared to countries with lower tax disparity, suggesting taxes affect firms’ investment decisions. - Empirical evidence shows that greater tax disparity across capital asset types is associated with higher misallocation. *International Monetary Fund | April 2017* ### CHAPTER 2 UpGRAdING THE TAx SySTEM TO BOOST pROdUCTIVITy ### CHAPTER 2 UpGRAdING THE TAx SySTEM TO BOOST pROdUCTIVITy ### Tax disparity across asset types (machinery versus buildings) - Analysis for manufacturing industries across 54 emerging market economies and low-income developing countries finds machinery-intensive industries have lower resource allocation efficiency where the tax disparity (EMTR on machinery minus EMTR on buildings) is higher (Annex 2.5). - Eliminating the tax disparity (EMTR on machinery equal to EMTR on buildings) would raise resource allocation efficiency in machinery‑intensive industries by: - 7¼ percentage points in emerging market economies. - 5½ percentage points in low‑income developing countries. (Figure 2.7) - Evidence from advanced economies corroborates these results: - United States (Liu 2011): differences in EMTRs by asset type cause underinvestment in computing and electronic equipment by about 25 percent and overinvestment in machinery and transportation equipment by about 18 percent. - For 11 advanced economies (Fatica 2013): differential taxation leads on average to underinvestment in capital related to information and communications technology and overinvestment in other machinery and equipment. ### Corporate debt bias and financing distortions - Corporate debt bias arises when interest expenses are deductible but returns to equity are not, raising the cost of equity relative to debt and discouraging equity-financed investments like R&D. - Debt bias is measured as the EMTR on equity minus the EMTR on debt. - Empirical results for nine advanced economies show corporate debt bias has a significant impact on resource misallocation (Annex 2.5). - If the median advanced economy reduced its debt bias to the level observed at the 10th percentile of the sample distribution, it could raise resource allocation efficiency of more R&D‑intensive industries by 3 percentage points (Figure 2.9). - Debt bias also poses a stability risk by contributing to excessive private sector leverage. ### Policy options to remove distortions by financing type - Allowance for Corporate Equity (ACE) system: - Deduction for an imputed return on equity so that investments earning a “normal” return are exempt from taxation. - By allowing deduction for both interest and the normal rate of return on equity, the ACE does not distort the choice between debt and equity. - Removes distortions between economic depreciation and tax depreciation (accelerated tax depreciation reduces book value, reducing ACE in later years and offsetting earlier benefits in present-value terms). - ACE systems have been effectively applied in Belgium, Cyprus, Italy, and Turkey. - Require careful design to mitigate potential revenue loss due to narrowing of the corporate tax base. - Cash Flow Tax (CFT): - Tax on money entering the business less money leaving the business; entails immediate expensing of all investment expenditures (100 percent first-year depreciation allowances) and no deductibility of interest payments or dividends. - Properly designed, a CFT does not affect the decision to invest, scale of investment, or discriminate across financing sources. - No country has adopted a comprehensive business cash flow tax; transition complexities are a likely reason. - The United States is considering a destination-based form of a cash flow tax, which raises distinct issues including possible adverse cross-country spillovers if implemented by only a subset of countries. ### Informality, tax compliance, and productivity - Informal firms (defined as firms failing to pay the full amount of tax due) reduce aggregate productivity by gaining a relative cost advantage through tax evasion and regulatory circumvention, allowing low‑productivity firms to persist and crowd out more productive, tax‑compliant firms. - Multiple proxies for informality show informal firms are typically less productive than formal firms (Figure 2.10): proxies include self-employment, noncontributors to a retirement pension scheme, share of unregistered firms, and prevalence of “cheats” (registered firms that underreport sales). - Empirical firm‑level results for manufacturing in emerging market economies and low‑income developing countries indicate: - Cheats that report only 30 percent of their sales (firms at the 25th percentile of the distribution of cheats) have a 4 percent lower TFP than tax-compliant firms in both emerging market economies and low‑income developing countries (Annex 2.6). - Tax policy and tax administration affect informality: - A 2012 Colombian tax reform reducing payroll taxes incentivized a shift from informal to formal employment (Box 2.2). - Taxes and regulations explain informality in Mexico (Leal Ordóñez 2014). - Brazil: tax reductions and simplification increased formal firms with higher revenue and profits (Fajnzylber, Maloney, and Montes‑Rojas 2011). - For 130 developing countries, a higher corporate tax rate increases the prevalence of cheats among small manufacturing firms (lowering the share of sales reported), but an effective and efficient revenue administration diminishes this effect (Annex 2.6). - The negative effect of the corporate income tax rate on sales reported for tax purposes by small manufacturing firms is considerably lower when tax administrations are stronger (Figure 2.11). - Median tax administration cost across the sample is 1 percent of revenue (used in the analysis). ### Strengthening tax administration to reduce informality - Measures to strengthen tax administrations and reduce the unfair advantage of informal firms: - Ensure taxpayer registration, taxpayer awareness of obligations, and accurate reporting. - Taxpayer segmentation by size (large, medium, small, micro) to tailor services and enforcement. - Risk‑based audit programs, with well‑trained auditors, to promote accurate reporting and encourage higher declarations from firms that are not audited. - Integration of tax and customs agencies to strengthen enforcement capacity by jointly identifying risks and developing response strategies. - Semiautonomous revenue agencies can help but international experience is mixed. - IMF (2015a) discusses additional options to improve tax compliance in detail. ### Preferential tax treatment by firm size and productivity effects - Size‑based preferential tax treatment (lower corporate tax rates for firms below thresholds of profits, turnover, or employees) can create a “small business trap”: - More productive firms may choose to remain small to retain eligibility, preventing growth and access to economies of scale and scope. - Empirical analysis for 54 emerging market economies and low‑income developing countries finds preferential tax treatment for small firms is associated with lower productivity: - Among industries with a high share of small firms, resource allocation efficiency is lower by 1½ percentage points in countries providing lower tax rates for small firms (Annex 2.5). - Benedek and others (forthcoming): across selected European countries, firms receiving more size‑related tax incentives experience lower TFP growth; potential TFP gains from eliminating size-related tax incentives for SMEs range between 0.8 percent and 2.9 percent when weighted by firm employment. - Policy guidance: - If targeted support is warranted to address specific constraints, preferential tax treatment should be targeted to new firms rather than to small firms in general, to support start‑ups while preserving incentives to grow. - Safeguards needed to limit abuse (for example, new legal entities created to renew preferences) and strong enforcement. - Alleviating tax compliance costs can encourage higher productivity among small firms, reducing the compliance burden that disproportionately affects smaller businesses. *International Monetary Fund | April 2017* ### CHAPTER 2 UpGRAdING THE TAx SySTEM TO BOOST pROdUCTIVITy ### CHAPTER 2 UpGRAdING THE TAx SySTEM TO BOOST pROdUCTIVITy ### Tax compliance costs, TAQI evidence, and firm productivity - Compliance costs include opportunity cost of employee time and cost of professional tax advice, with substantial fixed components (for example, filing a value-added tax return costs the same regardless of the net amount remitted), disproportionately burdening small businesses. - Dabla-Norris and others (forthcoming) compile a Tax Administration Quality Index (TAQI) drawing on the Tax Administration Diagnostic Assessment Tool (TADAT). The TAQI captures efforts to improve information flow to taxpayers, simplify tax structure, and streamline reporting requirements and procedures affecting tax compliance costs (see Annex 2.7 for details). - Empirical findings: - Countries with a high TAQI score (that is, lower tax compliance costs) see higher labor productivity among small firms and young firms (Figure 2.14, panels 1 and 2). - Similar results are obtained using electronic filing availability from the Revenue Administration Fiscal Information Tool (RA-FIT) as a proxy for tax compliance costs. - Definitions and notes: - Labor productivity refers to sales divided by the number of employees. - Small firms have fewer than 20 employees; medium-sized and large firms have 20 or more employees. - Young firms are less than seven years old; mature firms are seven or more years old. - A higher TAQI score implies lower tax compliance costs. Countries with a low (high) TAQI score are those at the 25th (75th) percentile of the sample distribution. - The electronic filing rate from RA-FIT is available across 42 countries over the 2011–13 period and is used as an imperfect proxy for tax compliance burdens. ### Limitations of the misallocation framework and extensions - Known caveats of the Hsieh and Klenow (2009) framework: - Quantifies misallocation only within sectors, not across sectors. - May overestimate gains from reallocation because of measurement error or model misspecification. - Static framework: does not capture dynamic shifts in firm productivity distribution or resource allocation over time (entry and exit). - Mitigations and related evidence: - Estimating misallocation relative to a top performer can mitigate some overestimation concerns. - Dabla-Norris and others (2015) show TFP gains from improving factor allocation across sectors average about 9 percent for selected advanced economies. - Recent research (Bento and Restuccia 2016; Haltiwanger 2016; Decker and others 2016) explores dynamic implications of misallocation, not considered here due to data constraints. - Transition and adjustment costs: - Estimates of TFP gains do not account for adjustment costs. Improving allocation will affect the mix of firms and workers; there will be winners and losers, requiring careful management. ### Productivity effects of international tax treatment and antiavoidance measures - Multinational companies often enjoy a lower tax burden than domestic counterparts due to profit shifting; example: Finke (2013) finds in 2007 German multinationals paid 27 percent less in taxes than a control group of domestic firms. - Policies like transfer-pricing regulations and thin-capitalization rules aim to raise domestic revenue and curb unfair competition, but: - Multinationals are often at the global productivity frontier and provide positive externalities for local firms, especially in developing countries (Figure 2.15). - New empirical analysis (De Mooij and Liu, forthcoming) for 27 advanced economies finds that following introduction of transfer-pricing regulations, multinational affiliates reduce their investment as a share of fixed assets by 1 to 3 percentage points (Annex 2.8) [text reports "1 to 3 percentage points" in context]. - Policy implication: international coordination in antiavoidance legislation is important, and some revenues from antiavoidance measures should support productivity-enhancing public investment (institutions, human capital, infrastructure). ### Conclusions and policy recommendations - Resource misallocation leads to lower productivity via wide dispersion in firm productivity even within narrow industries; some firms approach the world frontier, implying potential for catch-up. - Aggregate gains: - TFP gains from reducing resource misallocation could add roughly 1 percentage point to annual real GDP growth, based on estimates for a sample of 54 developing countries and 9 advanced economies. - Payoffs are higher for emerging market economies and low-income developing countries than in advanced economies, with considerable variation across countries. - Key reform priorities: - Upgrade tax system design to ensure firms’ decisions are driven by business reasons, not tax reasons. - Minimize differentiated tax treatment across assets and financing so investment is driven toward more productive assets rather than tax-favored ones. Well-designed ACE (allowance for corporate equity) systems or cash flow taxes can address distortions related to asset type and financing. - Level the playing field across firms to encourage growth of productive firms: - Reduce compliance costs (for example, through easy filing). - Promote compliance by registering taxpayers, ensuring taxpayer knowledge of obligations, and ensuring accurate reporting. - Adopt risk-based tax administration with strong audit capacity and taxpayer segmentation. - Reduce tax compliance costs to encourage growth and productivity among small and young firms; to avoid a “small business trap,” tax relief should be targeted to new firms rather than simply small firms. - Broader considerations: - Tax reform priorities must account for impacts on income distribution and revenue mobilization needs. - Other reforms to reduce misallocation include reducing credit market distortions and easing labor and product market regulatory burdens. - Any transition requires careful management due to winners and losers in reallocating resources. ### Effective Marginal Tax Rates (EMTRs) - EMTRs summarize the tax burden applied to before-tax capital income realized over an investment’s lifetime, as implied by major provisions of a country’s corporate tax code (statutory federal tax rates, surcharges, local tax rates, depreciation rates and accelerated depreciation, treatment of inventories, and interest deductibility). - Variation sources: - Across capital asset types: differences between tax depreciation (rates at which tax code allows deduction of asset cost) and economic depreciation (rates at which assets wear out). Greater acceleration in tax depreciation relative to economic depreciation lowers the EMTR. - Across financing sources: differences in deductibility of interest expenses and returns to equity. - EMTR estimations in this chapter are provided by the Oxford University Center for Business Taxation, following Devereux and Griffith 1998 (see Annex 2.4), calculated across asset types (machinery, buildings, intangibles, and inventories) and financing sources (debt, equity, and retained earnings) for each country-year. ### Colombia case study: 2012 tax reform to increase labor formality - Reform features and context: - Before 2012 reform, nonwage labor costs accounted for 60.3 percent of the average wage rate in Colombia. - Informality (13 main metropolitan areas) ranged from 50 to 60 percent depending on definition; by four years after reform informality had fallen by 6½ percentage points to 51 percent, with part of the decrease attributed to the reform. - Payroll taxes were reduced by 13.5 percentage points for workers earning up to 10 times the minimum wage: employer contributions for training (2 percentage points), in-kind transfers for low-income households (3 percentage points), and health (8.5 percentage points) were eliminated. - The payroll tax reduction implied a fall of 22.4 percent in the payroll tax. - To compensate revenue loss, a new firm tax CREE was created, effectively equivalent to a corporate income tax of 8 percent (temporarily set at 9 percent for 2013–15) with fewer deductions, while the corporate income tax was decreased from 33 to 25 percent, leaving the total tax rate on corporate income largely unchanged. - An alternative minimum personal income tax and changes in the value-added tax also helped compensate revenue losses. - Empirical evidence on impacts: - Studies (Steiner and Forero 2015; Kugler and Kugler 2015; Bernal, Eslava, and Meléndez 2015) found the reform increased the number of formal jobs by between 3.1 and 3.4 percent and increased wages by between 1.9 and 4.4 percent, with most impact among small and medium-sized enterprises. - The IMF (2015c) finds the payroll tax reduction had a positive effect on employment, investment, and GDP. - General equilibrium models (Steiner and Forero 2015; Anton 2014; Hernández 2012) find the reform increased formal employment by shifting demand toward formal salaried workers at the expense of informal salaried and own-account workers. - Timeline markers shown in Figure 2.2.1: - Tax reform approved in December 2012. - Removal of SENA and ICBF contributions in May 2013. - Removal of employer health contributions on January 1, 2014. - Definitions (DANE measures of informality): - Measure 1: workers who do not make contributions to either health or pension schemes. - Measure 2: workers employed in firms with no more than five employees; unpaid family helpers or housekeepers; self-employed persons with the exception of independent professionals and technicians; and owners of firms with no more than five workers. *International Monetary Fund | April 2017* ### Box 2.2. Colombia: Labor Tax Reform and the Shift from Informal to Formal Employment ### Box 2.2. Colombia: Labor Tax Reform and the Shift from Informal to Formal Employment ### Reform impact estimates - The 2012 reform reduced payroll taxes by 13.5 percentage points. - Various estimated effects on employment and informality: - Increased employment by between 3.4 and 7.4 percent of total employment. - Lowered informality by between 1.4 and 4.2 percent. - Fernández and Villar (2016) estimates (matching difference-in-differences): - The tax reform reduced the informality rate of the workers affected by the reform in the country’s 13 main metropolitan areas by between 4.3 and 6.8 percentage points. - Given that only 45 percent of the working population was affected by the reform, this translates to a reduction in the national informality rate of between 2.0 and 3.1 percentage points. ### Payroll tax changes (Percent of wage rate) - The 2012 reform reduced total payroll contributions from 60.3 to 46.8 (total = 60.3 to 46.8). - Breakdown by contribution (Prereform → Postreform): - Pensions 16.0 → 16.0 - Employer 12.0 → 12.0 - Employee 4.0 → 4.0 - Health Care 12.5 → 4.0 - Employer 8.5 → . . . - Employee 4.0 → 4.0 - Professional Risks 2.0 → 2.0 - Other Payroll Contributions 9.0 → 4.0 - Training (SENA) 2.0 → . . . - In-Kind Transfers (ICBF) 3.0 → . . . - Compensation Funds 4.0 → 4.0 - Paid Vacations 4.2 → 4.2 - Severance Pay 8.3 → 8.3 - Mandatory Bonuses 8.3 → 8.3 - Employer total 52.3 → 38.8 - Employee total 8.0 → 8.0 - Source for table values: Antón 2014. - Note: ICBF = Instituto Colombiano de Bienestar Familiar; SENA = Servicio Nacional de Aprendizaje. *International Monetary Fund | April 2017* ### Annex 2.2. Calculation of Resource Allocation ### Annex 2.2. Calculation of Resource Allocation Efficiency Using Firm-Level Data ### Data sources and sample construction - Developing-economy firm-level data: World Bank Enterprise Surveys (WBES). - Advanced-economy firm-level data: ORBIS (Bureau van Dijk), unconsolidated statements. - WBES sample after cleaning: a strongly unbalanced panel of 30 emerging market economies, 24 low-income developing countries, and 3 advanced economies spanning the 2002–16 period. - ORBIS sample after cleaning: nine countries over the 2006–13 period (Belgium, the Czech Republic, France, Italy, Portugal, the Slovak Republic, Slovenia, Spain, and Sweden). - ORBIS excludes Germany, Japan, the United Kingdom, and the United States owing to data constraints (consolidation reporting, insufficient observations after cleaning). ### Data cleaning procedures - WBES cleaning (based mostly on Inklaar, Lashitew, and Timmer 2016): - Remove observations with negative sales, capital, labor, and value added. - Remove implausibly high values of sales per worker. - Remove the bottom 2.5 and top 97.5 percentiles of computed output wedges, capital wedges, and total factor productivity. - Exclude all firms in industry-country-years with fewer than five observations or if less than half of the original number of observations remain. - Exclude all firms in country-years if fewer than 40 observations remain in total across all industries or if fewer than 40 percent of the original number of observations in total across all industries remain. - ORBIS cleaning (following Kalemli-Ozcan and others 2015 and literature on misallocation in advanced economies): - Omit negative, missing, and extreme values of key variables; retain countries only if at least 50 percent of manufacturing observations are retained or if the TFP sample accounts for at least roughly 70 percent of the manufacturing sector. - Remove top and bottom percentiles of wedges and TFP; remove the 1 percent tails of firm-level to industry-level total factor (revenue) productivity ratios. - Remove all firms in industry-country-years with fewer than 10 observations. - Drop firms with fewer than 10 employees and firms that had fewer than 20 employees in the first year they appear in the sample. - Exclude countries with large idiosyncratic year-to-year fluctuations in the number of firms. ### Estimation approach and parameter choices - Resource allocation efficiency estimated following Hsieh and Klenow (2009) (see Annex 2.1). - Sector and industry aggregation: - WBES: manufacturing sector at the two-digit ISIC industry level. - ORBIS: manufacturing sector at the four-digit NAICS industry level. - Services sector: calculated for advanced economies (ORBIS) but not for developing countries due to data constraints. - Parameter choices: - Output elasticity of labor and capital for each industry approximated by their cost shares in the United States (Bureau of Economic Analysis). - Elasticity of substitution between output of different firms set to 3. - Rental price of capital set to 0.1, assuming a real interest rate of 5 percent and a depreciation rate of 5 percent. - Cost of labor used to measure employment at the firm level (accounts for differences in hours worked and human capital). ### Sample counts and key statistics (Annex Table 2.2.1) - Coverage: - WBES: 30 EMEs, 24 LIDCs, 3 AEs. - ORBIS (manufacturing): 9 AEs. - ORBIS (services): 9 AEs. - Number of industries: - WBES: 187. - ORBIS (manufacturing): 376. - Number of years: - WBES: 1 year for most countries. - ORBIS: 8 years, 2006–13. - Revenue productivity: firm-level observations: - WBES Total: 26,649. - ORBIS (manufacturing) Total: 364,357. - ORBIS (services) Total: 306,908. - Sector-Country-Year Average: - WBES: 459. - ORBIS (manufacturing): 6,115. - ORBIS (services): 115. - Country-Year Average: - WBES: 375. - ORBIS (manufacturing): 5,061. - ORBIS (services): 4,263. - Resource allocation efficiency: country-industry observations: - WBES: 590. - ORBIS (manufacturing): 3,784. - ORBIS (services): 2,930. *Source: IMF staff compilations.* ### Simple illustrative example: distortive taxes and resource misallocation (Annex 2.3) - Model setup: - Managerial productivity A_i drawn from a Pareto density. - With a nondistortionary tax (τ_s^K = 0.35, τ_s^Y = 0.4 for all firms), capital allocation is perfectly correlated with firm-level productivity (more productive firms are larger and employ more capital and labor). - Distortive tax specification (illustrative): - 1 + τ_is^K = a + b(A_i) with b > 0 (taxes penalize more productive firms on capital). - 1 – τ_is^Y = c – d(A_i) with d > 0 (taxes penalize more productive firms on output). - Illustration results: - Under distortive taxes, more capital is allocated to less productive firms (solid green line in Annex Figure 2.3.1). - Annex Figure 2.3.2 compares capital shares by productivity ranges, showing distortive taxes allocate more capital to less productive firms than nondistortive taxes. - General message: distortive tax policies correlated with productivity induce resource misallocation and reduce aggregate TFP. ### Effective Marginal Tax Rates (EMTRs) calculation (Annex 2.4) - EMTR estimates used in this chapter provided by the Oxford University Center for Business Taxation. - Methodology basis: Devereux and Griffith (1998), starting from Hall and Jorgenson (1967) user cost of capital. - User cost of capital (p̃) formula components preserved in notation from source: - τ = statutory corporate tax rate. - π = expected inflation rate. - δ = economic rate of depreciation. - A = τφ(1 + ρ)/(ρ + φ) is the net present value of the depreciation allowance, with φ the rate at which capital expenditure can be offset against tax. - ρ = (1 – m_i)i/(1 – z) is the shareholders’ nominal discount rate, with m_i the personal tax rate on interest income, i the nominal interest rate, and z the accruals-equivalent capital gains tax rate. - γ = (1 – m_d)/((1 – c)(1 – z)) measures tax discrimination between new equity and distributions, with m_d the personal tax rate on dividend income and c the rate of tax credit available on dividends paid. - F_t captures additional cost of raising external finance; forms: - Retained earnings: F_t = 0. (A2.4.1) - New equity: F_t = –ρ(1 – γ)/(1 + ρ)(1 – φτ). (A2.4.2) - Debt: F_t = γ(1 – φτ)/(1 + ρ){ρ – i(1 – τ)}. (A2.4.3) - EMTR definition for new investment: - EMTR = (p̃ – r) / p̃, where p̃ is the expected pretax rate of return and r is the expected after-tax rate of return. - Limitations noted: - EMTRs sensitive to underlying assumptions (interest rate, inflation). - Typically computed under uniform and constant parameters that may not reflect country heterogeneity. - EMTR calculations may omit special credits, deductions, rates, and other tax provisions intended to encourage investment in specific assets or industries. - Calculations generally assume firms can use all deductions and credits, which may not hold for firms in loss positions or with unused tax losses/credit carryforwards. - Assume all investors are subject to corporate tax, ignoring tax avoidance opportunities and international capital flow effects. ### Econometric approach: Taxation and resource allocation efficiency within industries (Annex 2.5) - Objective: estimate effect of tax distortions on resource allocation efficiency within industries using a difference-in-differences (DID) approach (following Rajan and Zingales 1998). - Separate analyses for advanced and developing economies due to data constraints. - Focus for emerging market and low-income developing countries: disparities in EMTRs across asset types (machinery versus buildings) and impact on within-industry resource allocation efficiency. - Empirical specification (country k, industry j): - RAE_{j,k} = α + δ_j + γ_k + β_1 (tax_disparity_k * machinery_share_j) + B_x X_{j,k} + ε_{j,k} (A2.5.1) - RAE = country-industry-specific resource allocation efficiency (constructed from firm-level data). - tax_disparity = country-level EMTR on machinery minus EMTR on buildings (in absolute terms). - machinery_share = industry-specific capital intensity in machinery (share of total capital). - machinery_share measured using U.S. asset share in industry capital income to mitigate endogeneity (assumes U.S. faces least distortions). - δ_j and γ_k are industry and country fixed effects. - X_{j,k} controls: share of small firms, share of young firms, share of exporting firms, log of capital intensity in that industry, competition proxy (share of firms with two or more competitors), perceived access to finance as an obstacle (industry average). - β_1 is the DID estimate; expected to be negative if higher tax disparity reduces resource allocation efficiency in machinery-intensive industries. - Data sources: - Country-industry variables from World Bank Enterprise Surveys. - Country-level EMTRs from Oxford University Center for Business Taxation. - Asset shares in industry capital income for the United States from the Bureau of Labor Statistics. - Data set size: - Maximum of 573 observations across 18 industries for 30 emerging market and 24 low-income developing countries. *Source: IMF staff compilations.* ### Annex Table 2.5.1 presents the main regression results. ### fmc2 - Annex Table 2.5.1 presents the main regression results ### Developing countries — Disparity in Effective Marginal Tax Rates (EMTRs) and resource allocation efficiency - Specification summary: - Column (1) estimates equation (A2.5.1) with controls for the share of firms with more than two competitors and financing constraints; columns (2) and (3) add additional country-industry-specific controls. Columns (3) to (6) add an interaction between the share of small firms in the industry and the perception of financing constraints in the industry. - Key findings and magnitudes: - A 1 percentage point reduction in tax disparity is associated with a 1–1.5 percentage point increase in resource allocation efficiency in industries that are more capital intensive in machinery. - Reducing the tax disparity to that observed at the 10th percentile of the distribution (zero tax disparity) would raise resource allocation efficiency for the median emerging market economy by 7¼ percentage points in machinery-intensive industries. - The same reduction would raise resource allocation efficiency for the median low-income developing country by 5½ percent. - Main regression coefficients (Annex Table 2.5.1): - Disparity in EMTRs k × Machinery as Share of Total Assets j: - Column (1): –1.172* - Column (2): –1.267* - Column (3): –1.678*** - Column (4): –1.144* - Column (5): –1.263* - Column (6): –1.663*** - Other reported estimates (selected): - Firm Capital Intensity j,k: 0.039 0.035 0.037 0.033 (columns vary) - Share of Exporting Firms j,k: 0.004*** 0.004*** (standard errors in parentheses: (–0.001) (–0.001)) - Number of Observations: 286 (for each column reported) - R2: 0.513 0.525 0.552 0.51 0.521 0.547 (by column) - Notes: - The disparity in EMTRs is defined as the EMTR on machinery minus the EMTR on buildings. - Standard errors are clustered by industry. - Significance indicators: *p < 0.1; **p < 0.05; ***p < 0.01. ### Advanced economies — Corporate debt bias and industry-level resource allocation efficiency - Empirical strategy: - DID approach testing equation (A2.5.2): RA E j,k,t = α + δj + γk + χt + β1 (debtbiaskt * R&D intensityj) + εj,k,t, where debtbias is the country-level EMTR on equity-financed investment minus the EMTR on debt-financed investment, and R&D intensity is industry-specific (OECD-normalized). - External equity dependence is used as an alternative interaction variable. - Data and sample: - Country-level EMTRs from the Oxford University Center for Business Taxation. - R&D intensity and external equity dependence from Brown and Martinsson 2016. - Main estimation sample: unbalanced panel of 3,784 observations, across nine advanced economies, over the period 2006–13. - Key findings and magnitudes: - A 1 percentage point reduction in debt bias is associated with a 0.01 percentage point increase in resource allocation efficiency in industries that are more intensive in R&D (column (3) result). - Reducing debt bias to the 10th percentile of the distribution (29 percentage points) would allow the median advanced economy to increase resource allocation efficiency in R&D-intensive industries by 3 percentage points. - The median debt bias reduction in the sample would be 13 percentage points. - Using equity dependence as the interaction term yields similar results: a 1 percentage point reduction in debt bias is associated with a 0.02 percentage point increase in resource allocation efficiency in industries more dependent on equity; reducing debt bias to the 10th percentile would increase resource allocation efficiency by 3 percentage points (median advanced economy). - Main regression coefficients (Annex Table 2.5.2): - Debt Bias k × R&D Intensity j: - Column (1): –0.00781*** - Column (2): –0.00815*** - Column (3): –0.00900*** - Robust standard errors in parentheses: (0.00120) (0.00126) (0.00163) - Debt Bias k × Equity Dependence j: - Column (4): –0.0198*** - Column (5): –0.0204*** - Column (6): –0.0231*** - Robust standard errors in parentheses: (0.00307) (0.00322) (0.00422) - Number of Observations: 3,784 (all columns) - R2: 0.301 0.318 0.411 0.301 0.318 0.411 (by column) - Fixed effects specifications (by column): combinations of Country Fixed Effects, Industry Fixed Effects, Time Fixed Effects, Country × Time, Industry × Time, Country-Industry Fixed Effects (as listed in the table). - Notes: - Robust standard errors are clustered by country and industry. - Significance indicators: *p < 0.1; **p < 0.05; ***p < 0.01. ### Emerging markets and low-income developing economies — Preferential tax regimes for small firms - Empirical strategy: - DID estimation of equation (A2.5.3): RA E j,k = α + δj + γk + β1 (preferential_treatmentk * share_smallj,k) + βx Xj,k + εj,k. - preferential_treatment is a dummy equal to 1 if the country offers lower tax rates for small firms; share_smallj,k is the share of small firms in the industry. Xj,k includes controls such as share of small firms, share of young firms, share of exporting firms, log capital intensity, competition proxy, and financing-constraint proxy. - Data and sample: - Country-industry variables from World Bank Enterprise Surveys. - Data on countries that provide lower tax rates for small firms from the KPMG database. - Data set contains a maximum of 501 observations across 18 industries in 30 emerging market economies and 24 low-income developing countries. - Key findings and magnitudes: - Countries that provide lower tax rates for small firms exhibit lower resource allocation efficiency. - For industries with a larger share of small firms, resource allocation efficiency is lower by between 1.2 and 1.6 percentage points in countries that offer lower tax rates for small firms compared with countries that do not. - Main regression coefficients (Annex Table 2.5.3): - Lower Tax for Small Firms Dummy k × Share of Small Firms j: - Column (1): –1.193** - Column (2): –1.587** - Standard errors in parentheses: (–0.477) (–0.63) - Selected controls (column (2)): - Capital Intensity jk: 0.014*** (–0.004) - Share of Exporting Firms jk: 0.001* (–0.001) - Share of Firms with 2+ Competitors jk: –0.092*** (–0.018) - Number of Observations: 501 (column (1)); 484 (column (2)) - R2: 0.079 0.127 - Notes: - Standard errors are clustered by industry. - Significance indicators: *p < 0.1; **p < 0.05; ***p < 0.01. ### Firm-level productivity, informality (cheating), and tax policy/administration - Research questions and specifications: - Whether firm-level total factor productivity (TFP) is lower for cheats (registered firms that underreport their sales to the tax authority) — equation (A2.6.1): TFPi,j,k = γk + δj + β1 salesreportedi,j,k + β2 Zi,j,k + εi,j,k. - Whether the statutory CIT rate and tax administration features affect the prevalence of cheating among small firms — DID equation (A2.6.2): salesreportedi,j,k = γk + δj + β1 (smalli,j,k × CITk) + β2 (smalli,j,k × CITk × taxadmk) + β3 Zi,j,k + εi,j,k. - Variables and expectations: - salesreported = share of sales reported to tax authorities; TFP measured following Levinsohn and Petrin (2003). - β1 in (A2.6.1) expected negative if underreporting reduces TFP. - β1 in (A2.6.2) expected negative if higher CIT encourages small firms to underreport; β2 expected positive if stronger tax administration mitigates the effect. - taxadmin indicates features associated with stronger tax enforcement and lower compliance costs: integrated tax and customs agency, functionally organized tax administration, semiautonomous revenue agency (SARA), large taxpayer office (LTO). - Country-level corroboration: - Cross-country regressions (A2.6.3 and A2.6.4) test the relationship between informality proxies and TFP, and the effect of CIT and tax administration on informality: - TFPk = α + λ Zk + β1 noncontributorsk + εk. - noncontributorsk = α + λ Zk + β1 CITk + β2 (CITk × taxadmk) + εk. - noncontributors = fraction of labor force not contributing to a retirement pension scheme (proxy for informality); self-employment share used as alternative proxy. - β1 in (A2.6.3) expected negative (higher informality associated with lower TFP). - β1 in (A2.6.4) expected positive (higher CIT increases informality); β2 expected negative (better tax administration mitigates effect). - Two-stage least-squares IV used to address endogeneity with instruments: secondary enrollment rate, intellectual property protection, independence of judiciary. - Data sources and sample sizes: - Firm-level data from World Bank Enterprise Surveys covering 130 countries; sales reported data available for 2002–10. - Tax administration characteristics from U.S. Agency for International Development Tax Database for 2007–12 (measures include tax administration costs as % of revenue, integrated tax/customs agency indicator, functionally organized administration, SARA, LTO). - Statutory CIT rates from the IMF’s Tax Policy Database. - Country-level TFP from Penn World Table 9.0; fraction noncontributors from World Bank Social Protection pensions database (116 countries, 2000–15). - Conceptual implication: - Weak tax enforcement that allows underreporting creates a cost advantage for informal firms, potentially leading to lower aggregate productivity through increased weight of less productive informal firms. *Source: IMF staff calculations (Annex Tables 2.5.1–2.5.3 and Annex 2.6 empirical descriptions).* ### Annex Table 2.6.1 provides the results linking firm- ### Annex Table 2.6.1 provides the results linking firm- ### Firm-level productivity and informality - Dependent variable: Firm-Level Total Factor Productivity. - Baseline specification (Column (1)) includes country and industry fixed effects; Column (2) includes year fixed effects; Column (3) retains only the latest available data for firms surveyed twice or more. - Key coefficient: - Sales Reported_i: 0.0016*** (Column (1)); 0.0018*** (Column (2)); 0.0018*** (Column (3)). (Standard errors reported as (0.000) in all columns.) - Interpretation: - A 1 percentage point increase in sales reported is associated with a 0.001 percentage point increase in firm-level TFP (reported coefficients above). - Firms that report only 30 percent of their sales (equivalent to the firm at the 25th percentile of the distribution of cheats) have a 4 percent lower TFP than tax-compliant firms. - Other reported covariates and estimates: - Age_i: 0.0065*** (Column (1)); 0.0063*** (Column (2)); 0.0065*** (Column (3)). (Standard errors (0.001).) - Corruption_i: −0.001 (Column (1)); −0.004 (Column (2)); 0.001 (Column (3)). (Standard errors (0.008), (0.008), (0.009).) - Sample and fit: - Number of Observations: 11,499 (Columns (1) and (2)); 10,604 (Column (3)). - R^2: 0.421 (Column (1)); 0.432 (Column (2)); 0.446 (Column (3)). - Industry Fixed Effects: Y Y Y - Country Fixed Effects: Y Y Y - Note: Standard errors are in parentheses and are clustered by country and industry. Significance: *p < 0.1; **p < 0.05; ***p < 0.01. ### Country-level regressions linking informality and productivity (Annex Table 2.6.2) - Dependent variable: Log Total Factor Productivity at Country Level. - Alternative proxies for informality: - Noncontributors to pensions (log) (Column (1)): −0.540* (standard error (−0.281)). - Self-employment (log) (Column (2)): −0.419** (standard error (−0.161)). - Other covariates: - GDP (log): 0.058 (Column (1)); 0.0419 (Column (2)). (Standard errors (−0.05), (−0.048).) - Population size (log): −0.0443 (Column (1)); −0.0141 (Column (2)). (Standard errors (−0.075), (−0.07).) - Sample and diagnostics: - Number of Countries: 101 (Column (1)); 103 (Column (2)). - Underidentification (p-value): 0.001 (Column (1)); 0.002 (Column (2)). - Weak-identification (KP F-stat): 5.883 (Column (1)); 12.774 (Column (2)). - Weak-instrument (SW S-stat): 0.068 (Column (1)); 0.155 (Column (2)). - Hansen (p-value): 0.153 (Column (1)); 0.326 (Column (2)). - Conclusion: Country-level results confirm firm-level results that lower informality is associated with higher productivity. - Note: Standard errors are in parentheses. The underidentification and weak-identification hypotheses are rejected. The instruments employed also pass the Hansen overidentification test. KP F-stat = Kleibergen-Paap F-statistics; SW S-stat = Stock-Wright S-statistics. Significance: *p < 0.1; **p < 0.05; ***p < 0.01. ### Firm-level informality, CIT rates, and tax administration (Annex Table 2.6.3) - Dependent variable: Percent of Total Sales Reported for Tax Purposes. - Columns (1)–(5) present DID specifications interacting CIT_k × Small Firm_i with alternative tax administration characteristics: - Column (1): tax administration costs as a percentage of total revenue. - Column (2): functional organization. - Column (3): integrated tax and customs agency. - Column (4): SARA (semi-autonomous revenue agency). - Column (5): LTO (large taxpayer office). - Selected coefficients and estimates (exact values preserved): - Age_i: 0.0338 (Col 1); 0.0599*** (Col 2); 0.0525** (Col 3); 0.0511** (Col 4); 0.0537** (Col 5). (Standard errors (0.023),(0.022),(0.021),(0.021),(0.021).) - Licensing/Permit Constraints_i: −1.640*** (Col 1); −0.904** (Col 2); −1.116** (Col 3); −1.079** (Col 4); −1.176** (Col 5). (Standard errors (0.543),(0.454),(0.453),(0.449),(0.473).) - Perception of Corruption as a Constraint_i: −0.292 (Col 1); −0.852** (Col 2); −0.753** (Col 3); −0.775** (Col 4); −0.734** (Col 5). (Standard errors (0.409),(0.363),(0.349),(0.349),(0.354).) - CIT_k × Small Firm_i: −0.172 (Col 1); −0.458*** (Col 2); −0.316** (Col 3); −0.227* (Col 4); −0.221 (Col 5). (Standard errors (0.119),(0.167),(0.138),(0.116),(0.160).) - Interaction coefficients adding tax-administration characteristics (Columns where reported): - CIT_k × Tax Administration Cost_k × Small Firm_i: 0.0714*** (standard error (0.027)). - CIT_k × Functional Organization_k × Small Firm_i: 0.333** (standard error (0.135)). - CIT_k × Integrated Tax and Customs Agency_k × Small Firm_i: 0.0913 (standard error (0.056)). - CIT_k × Semi-Autonomous Revenue Agency_k × Small Firm_i: 0.102* (standard error (0.053)). - CIT_k × Large Taxpayer Office_k × Small Firm_i: 0.0574 (standard error (0.126)). - Sample and fit: - Number of Observations: 4,695 (Col 1); 8,993 (Col 2); 9,573 (Col 3); 9,675 (Col 4); 9,278 (Col 5). - R^2: 0.099 (Col 1); 0.167 (Col 2); 0.174 (Col 3); 0.175 (Col 4); 0.159 (Col 5). - Industry Fixed Effects: Y Y Y Y Y - Country Fixed Effects: Y Y Y Y Y - Conclusion: Firm-level DID regressions show that a stronger tax administration can help offset the effect of a higher tax rate on the percentage of sales reported by small firms. - Note: Standard errors are in parentheses and are clustered by country and industry. CIT = corporate income tax. Significance: *p < 0.1; **p < 0.05; ***p < 0.01. ### Country-level informality, tax rates, and tax administration (Annex Table 2.6.4) - Dependent variable: Noncontributors to Pensions at Country Level (log). - Key covariates and coefficients (exact values preserved): - GDP (log): −0.120*** (Col 1); −0.114*** (Col 2); −0.0935*** (Col 3); −0.0958*** (Col 4); −0.103*** (Col 5). (Standard errors (0.035),(0.022),(0.016),(0.019),(0.018).) - Population Size (log): 0.225*** (Col 1); 0.178*** (Col 2); 0.149*** (Col 3); 0.155*** (Col 4); 0.159*** (Col 5). (Standard errors (0.059),(0.035),(0.030),(0.034),(0.027).) - Log_CIT: 0.103 (Col 1); 0.231 (Col 2); 0.127 (Col 3); 0.0195 (Col 4); 0.266 (Col 5). (Standard errors (0.212),(0.167),(0.124),(0.111),(0.415).) - Integrated Tax and Customs Agency: −1.579** (standard error (0.758)); Log_CIT × Integrated Tax and Customs Agency: 0.456** (standard error (0.221)). - Semiautonomous Revenue Agency: −1.355** (standard error (0.535)); Log_CIT × Semiautonomous Revenue Agency: 0.421*** (standard error (0.160)). - Sample and fit: - Number of Countries: 47 (Col 1); 89 (Col 2); 100 (Col 3); 102 (Col 4); 93 (Col 5). - R^2: 0.486 (Col 1); 0.442 (Col 2); 0.460 (Col 3); 0.453 (Col 4); 0.545 (Col 5). - Conclusion: Country-level results reiterate the firm-level findings that a stronger tax administration can help reduce the incidence of informality. - Note: Standard errors are in parentheses and are clustered by country and industry. CIT = corporate income tax. Significance: *p < 0.1; **p < 0.05; ***p < 0.01. ### Tax compliance costs and firm productivity (Annex 2.7 and Annex Table 2.7.1) - TAQI (Tax Administration Quality Index): - Constructed from TADAT data across 33 dimensions grouped into four categories: (1) supporting taxpayer information, (2) filing and payment, (3) postfiling processes, (4) accountability and transparency. - Measured on a scale of 0 to 4, with a higher score implying lower compliance costs. - Empirical strategy: - Difference-in-differences approach interacting TAQI_k with dummies for small firms and young firms. - PROD is labor productivity (in logs). Small_i = 1 if fewer than 20 employees; young_i = 1 if younger than seven years old (25th percentile). - Specifications control for country and industry fixed effects (or combined country-industry fixed effects) and firm-level controls Z_i,j,k. - Main results (Annex Table 2.7.1): - Baseline findings show higher TAQI scores are associated with higher labor productivity in small and young firms. - Small_i × TAQI_k: 0.563*** (Column (1)); 0.508*** (Column (2)). (Standard errors (0.088),(0.094).) - Young_i × TAQI_k: 0.190*** (Column (4)); 0.158** (Column (5)). (Standard errors (0.065),(0.064).) - Magnitudes (from specifications (2) and (5)): - For every one unit increase in the TAQI, labor productivity is 51 percent higher in the case of small firms and 16 percent higher in the case of young firms. - Additional sample estimates and controls: - Small_i: −1.230*** (Col 1); −1.143*** (Col 2); −0.224*** (Col 3); −0.231*** (Col 4); −0.230*** (Col 5). (Standard errors vary as reported.) - Young_i: −0.163*** (Col 1); −0.134*** (Col 2); −0.199*** (Col 3); −0.498*** (Col 4); −0.412*** (Col 5). - Exporter_i: 0.330*** (Col 1); 0.307*** (Col 2); 0.374*** (Col 3); 0.323*** (Col 4); 0.305*** (Col 5); 0.324*** (Col 6). (Standard errors reported.) - Foreign_i: 0.308*** (Col 1); 0.326*** (Col 2); 0.365*** (Col 3); 0.310*** (Col 4); 0.323*** (Col 5); 0.312*** (Col 6). - Sample and fit: - Number of Observations: 11,354 across specifications. - R^2 ranges from 0.579 to 0.598 across columns. - Number of Countries: 21 in reported specifications. - Number of Industries: 23 in reported specifications. - Fixed effects vary by specification (Country Fixed Effects: Yes/No; Industry Fixed Effects: Yes/No; Country × Industry: Yes/No as reported). - Interpretation: - Specification (2) implies that in countries with a low TAQI score (at the 25th percentile of the sample distribution), the productivity of small firms is about 40 percent of the productivity of larger firms. In countries with a high TAQI score (at the 75th percentile), productivity differences between small and larger firms are much smaller. - For young firms, specification (5) implies productivity of young firms is 75 percent of mature firms in countries with a low TAQI score; differences are only a few percentage points in countries with higher TAQI scores. - Note: Standard errors are in parentheses and are clustered by country and industry. TAQI = Tax Administration Quality Index. Significance: *p < 0.1; **p < 0.05; ***p < 0.001. _Annex tables and results as reported in the source content._ ### Annex Figure 2.8.1. Countries with Transfer-Pricing ### Annex Figure 2.8.1. Countries with Transfer-Pricing Regulations ### Data - Primary data set: an unbalanced panel of 130,062 companies in 27 countries for the years 2006–14. - Data constructed using unconsolidated financial statements of affiliates of domestic and multinational company groups in the ORBIS database provided by Bureau van Dijk. - Definitions: - Multinational affiliate: a company with an ultimate parent company that owns at least 50 percent of its shares and is located in a foreign country. - Domestic affiliate: a company with an ultimate parent company that owns at least 50 percent of its shares and is located in the same country, and all the other affiliates of its parent company are located in the same country. - MNCcomplex is a dummy variable equal to 1 if the number of countries (or companies) in which a particular multinational company’s group operates is above the median number of countries (companies) in the sample. - Share of intangible assets: defined as the average share of intangible fixed assets relative to total fixed assets for each firm. ### Main estimation results (Annex Table 2.8.1) - Dependent variable: Investment per Dollar of Fixed Assets. - Coefficients on MNC_i × TPR_kt: - Column (1): –0.027*** (0.003) - Column (2): –0.024*** (0.003) - Column (3): –0.011*** (0.003) - Column (4): –0.010*** (0.003) - Column (5): –0.010*** (0.003) - Coefficient on MNC_i × TPR_kt × CIT_kt (Column (6)): –0.021*** (0.004) - Other covariates (selected): - Log(Sales_t–1): - Column (1): –0.094*** (0.003) - Column (2): –0.096*** (0.003) - Column (3): –0.088*** (0.003) - Column (4): –0.088*** (0.003) - Column (5): –0.088*** (0.003) - Cash Flow per Dollar of Fixed Assets: 0.018*** (Columns (1)–(5): (0.000)); Column (6): 0.019*** (0.000) - Profitability_t–1: - Columns (1)–(5): 0.076** (0.007), 0.072** (0.007), 0.065** (0.007), 0.064** (0.007), 0.064** (0.007) - Column (6): 0.016** (0.008) - Sales Growth Rate_t–1: - Columns (1)–(5): 0.031*** (0.003), 0.029*** (0.003), 0.027*** (0.003), 0.027*** (0.003), 0.027*** (0.003) - Column (6): –0.013*** (0.003) - Number of Observations: - Columns (1)–(5): 679,555 (Columns (4) and (5) show 679,554/679,554 in table formatting) - Column (6): 492,087 - R^2: - Columns (1)–(6): 0.317, 0.318, 0.324, 0.325, 0.325, 0.359 - Fixed effects included: - Firm Fixed Effects: Y in all columns - Year Fixed Effects: Y in all columns - Country-Year Fixed Effects: added in Column (3) onward - Industry-Year Fixed Effects: added in Column (4) onward - Country-Industry Fixed Effects: added in Column (5) onward - Note: Standard errors are in parentheses and are clustered by country and industry. CIT = corporate income tax; MNC = multinational company; TPR = transfer-pricing regulation. Significance: *p < 0.1; **p < 0.05; ***p < 0.01. ### Magnitude and interpretation of effects - On average, introduction of transfer-pricing regulations would decrease investment as a percentage of fixed assets among multinational affiliates by 1–3 percentage points. - Given that multinational affiliates invest about 30 cents per dollar of their fixed assets, this implies a reduction of 3–5 percent in multinational investment in response to the introduction of TPRs. - The negative impact of TPRs on investment is mainly concentrated in large, more complex multinationals and is smaller for multinationals with a higher share of intangible assets (which facilitates profit shifting via royalty payment). ### Heterogeneity and robustness (Annex Table 2.8.2 and Figure 2.8.2) - Annex Table 2.8.2 (Dependent variable: Investment per Dollar of Fixed Assets) — interaction with MNC complexity: - MNC_it × TPR_Kt: - Column (1) Number of Companies: –0.005 (0.009) - Column (2) Number of Countries: –0.006 (0.008) - MNC_it × TPR_Kt × MNCComplex,it: - Column (1): –0.016* (0.008) - Column (2): –0.017** (0.008) - Number of Observations: 605,908 (both specifications) - R^2: 0.273 (both specifications) - Firm and year fixed effects and country-year, industry-year, country-industry fixed effects: Y in both specifications - Note: Standard errors are in parentheses and are clustered by country and industry. MNC = multinational company; TPF = transfer-pricing regulation. Significance: *p < 0.1; **p < 0.05; ***p < 0.01. - Annex Figure 2.8.2 (Estimated effect of TPRs on investment, taking into account intangible assets): - Reported relationship: Mean investment effect of transfer-pricing regulation (percent of fixed assets) - Regression line: Mean Effect = – 0.011 + 0.001 × Share of Intangible Assets - Visual range on vertical axis in figure: –1.2, –0.9, –0.6, –0.3, 0.0, 0.3, 0.6 (percent of fixed assets) - Horizontal axis in figure: 0 5 10 15 (presumably percent share of intangible assets) - Source cited for figure: De Mooij and Liu, forthcoming. ### Policy implications - TPRs have a moderate negative effect on multinational investment; estimated decreases in investment per dollar of fixed assets range from 1–3 percentage points on average. - When evaluating anti-avoidance provisions such as transfer-pricing regulations, policymakers should account for: - The estimated reduction of 3–5 percent in multinational investment given the baseline investment intensity (30 cents per dollar of fixed assets). - Concentration of negative effects in large, more complex multinationals. - Smaller negative effects for multinationals with higher shares of intangible assets, reflecting alternative profit-shifting channels. - Overall, the moderate investment effects should be weighed against expected gains in tax revenues and national welfare when designing and implementing TPRs. *Source: IMF staff calculations; figures and tables as presented in the source content.* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2017/april/pdf/fmc2.pdf_