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The welfare loss from differential taxation of sectors in Germany

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  • Doina Radulescu
  • Michael Stimmelmayr

Abstract

In the spirit of Harberger, we apply a dynamic computable general equilibrium (CGE) model and estimate the excess burden stemming from the tax-induced distortion in the allocation of capital across the corporate and the non-corporate sectors in Germany. In doing so, we perform a counterfactual analysis and ask how the allocation of capital across sectors would change compared with a sector-neutral tax system which assures an identical effective tax burden on both sectors. Our estimates suggest that the excess burden per period ranges from 2.0 to 3.6 billion Euros or from about 0.1 to 0.16 per cent of GDP. In present value terms, the excess burden translates to about 104 billion Euros or 4.7 per cent of GDP. In order to identify the impact of the firm’s financial behaviour on the size of the emerging excess burden, we perform several sensitivity analyses with regard to debt financing, external equity financing and debt constraints via agency cost.
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Suggested Citation

  • Doina Radulescu & Michael Stimmelmayr, 2010. "The welfare loss from differential taxation of sectors in Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(2), pages 193-215, April.
    • Handle: RePEc:kap:itaxpf:v:17:y:2010:i:2:p:193-215
    DOI: 10.1007/s10797-009-9113-4
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    More about this item

    Keywords

    Capital income taxation; Non-uniform taxation; Computable general equilibrium modelling; C68; D92; H21;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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