The Effect of Fixed Taxation on Inter-industry Capital Reallocation: A Cross-country Analysis

Following the rationale of the Baily-Bartelsman-Haltiwanger decomposition model, this study analyses the contribution made to aggregate productivity growth by inter-industry capital reallocation in five large OECD countries from 1995 through 2014. The results show that the between-effect of reallocation can indeed play an important role in stimulating aggregate capital productivity growth. In light of this finding, this study attempts to conceptualize a model to measure the extent to which industry-fixed taxation inhibits the efficient allocation of capital across heterogeneous industry. The results of the regression analyses dot not allow for a concise measurement of the effect of industry-fixed taxation on inter-industry capital reallocation. The limitations of this study which have been identified offer a hopeful outlook for future research on this topic.