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Economic integration and the optimal corporate tax structure with heterogeneous firms

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Author Info

  • Bauer, Christian
  • Davies, Ronald B.
  • Haufler, Andreas

Abstract

This paper links recent tax-rate-cut-cum-base-broadening reforms of corporate taxation to the closer integration of international trade. We study the corporate tax structure in a small open economy with heterogeneous firms, in a setting where it is optimal to subsidize capital inputs by granting a tax allowance in excess of the true costs of capital. Economic integration reduces the optimal capital subsidy and drives low-productivity firms from the small country's home market, replacing them with high-productivity exporters from abroad. This endogenous policy response creates a selection effect that increases the average productivity of home firms when trade barriers fall, in addition to the well-known direct effects.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 110 (2014)
Issue (Month): C ()
Pages: 42-56

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Handle: RePEc:eee:pubeco:v:110:y:2014:i:c:p:42-56

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Corporate tax reform; Trade liberalization; Firm heterogeneity;

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References

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Cited by:
  1. Dominika Langenmayr & Andreas Haufler & Christian J. Bauer, 2012. "Should tax policy favor high- or low-productivity firms?," Working Papers 130, Bavarian Graduate Program in Economics (BGPE).
  2. Peter Egger & Horst Raff, 2011. "Tax Rate and Tax Base Competition for Foreign Direct Investment," Kiel Working Papers 1734, Kiel Institute for the World Economy.

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