Driving total factor productivity: Capital and labor with tax allocation

In small and micro enterprises, the capital and labor input change frequently with time, which is difficult to observe directly. Therefore, it is a challenging problem to measure total factor productivity, the source of sustainable economic growth. This paper establishes a new time-varying production function model to measure the Total Factor Productivity for small and micro enterprises, as well as its corresponding technological progress and efficiency improvement. Based on the data of 7158 small and micro enterprises in Yuhuan China Auto Parts City. The results of this paper find that Total factor productivity is mainly attributed to technological progress, which is mainly driven by labor force. Efficiency improvement is also changing in the same direction as labor-driven efficiency improvement Human resource management may be the main reason for low efficiency. As a policy implication of our results, this paper designs a policy allocation using delaying tax payment and proper tax policy allocation. The economic and social benefits of enterprises can be balanced and total factor productivity can be promoted.