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Corporation Tax Asymmetries: An Oligopolistic Supergame Analysis

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  • Pierre-Pascal Gendron
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    Abstract

    Corporation tax systems around the world treat gains and losses asymmetrically. This paper examines the impact of changing the refundability of tax losses in a cash flow tax system. A dynamic game of complete information is used to analyse refund policies in an imperfectly competitive setting. In this supergame, firms produce a homogeneous good and sustain tacit collusion by using credible and severe punishments of deviations. The analysis of the most collusive equilibrium with losses indicates that a tax policy which increases refundability has the following impacts: it reduces collusive industry output, increases market price, and therefore enhances tacit collusion. This policy also reduces social welfare even though refunds are never given in equilibrium.

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    File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-04.ps
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    File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-04.pdf
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    Bibliographic Info

    Paper provided by University of Toronto, Department of Economics in its series Working Papers with number ecpap-96-04.

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    Length: 31 pages
    Date of creation: 08 Jul 1996
    Date of revision:
    Handle: RePEc:tor:tecipa:ecpap-96-04

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    1. Davidson, Carl & Martin, Lawrence W, 1985. "General Equilibrium Tax Incidence under Imperfect Competition: A Quantity-setting Supergame Analysis," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1212-23, December.
    2. Mintz, Jack M, 1981. "Some Additional Results on Investment, Risk Taking, and Full Loss Offset Corporate Taxation with Interest Deductibility," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 631-42, November.
    3. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation for Research in Economics, Yale University.
    4. Rees, Ray, 1993. "Collusive Equilibrium in the Great Salt Duopoly," Munich Reprints in Economics 3413, University of Munich, Department of Economics.
    5. Drew Fudenberg and Jean Tirole., 1986. "Noncooperative Game Theory for Industrial Organization: An Introduction and Overview," Economics Working Papers 8613, University of California at Berkeley.
    6. Alan J. Auerbach, 1983. "The Dynamic Effects of Tax Law Asymmetries," NBER Working Papers 1152, National Bureau of Economic Research, Inc.
    7. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, April.
    8. Rosanne Altshuler & Alan J. Auerbach, 1987. "The Significance of Tax Law Asymmetries: An Empirical Investigation," NBER Working Papers 2279, National Bureau of Economic Research, Inc.
    9. Edwards, J S S & Keen, M J, 1985. "Inflation and Non-neutralities in the Taxation of Corporate," Oxford Economic Papers, Oxford University Press, vol. 37(4), pages 552-75, December.
    10. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
    11. Rees, Ray, 1993. "Collusive Equilibrium in the Great Salt Duopoly," Economic Journal, Royal Economic Society, vol. 103(419), pages 833-48, July.
    12. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
    13. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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    Cited by:
    1. Pierre-Pascal Gendron, 2001. "Corporation Tax Asymmetries and Cartel Unity," International Tax and Public Finance, Springer, vol. 8(5), pages 659-674, November.

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