Slow productivity growth in advanced economies holds back income gains and therefore improvements in well-being. Sluggish productivity gains in aggregate hide a growing gap between firms at the frontier, which display sustained productivity growth, and the rest of firms whose productivity stagnates. The empirical analysis – based on firm-level data for the period 1998–2014 – uncovers the existence of a tax burden gap alongside the productivity gap: firms at the frontier pay less for each dollar of profits than lagging firms. This heterogeneous impact of taxation may hinder productivity diffusion, as it reduces incentives (and opportunities) for lagging firms to catch up with the frontier. The negative impact of taxation is particularly important when associated with cash constraints, weak demand and other framework conditions (e.g. labour market legislation, trade openness). The analysis shows that complementing tax incentives with policies to ease cash constraints would help to narrow the productivity gap.
