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Economic integration and the optimal corporate tax structure with heterogeneous firms

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Author Info

  • Christian Bauer

    (University of Munich)

  • Ronald B Davies

    (University College Dublin)

  • Andreas Haufler

    (University of Munich)

Abstract

We study the optimal combination of corporate tax rate and tax base in a model of a small open economy with heterogeneous firms. We show that it is optimal for the small country's government to effectively 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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File URL: http://www.ucd.ie/t4cms/WP11_15.pdf
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201115.

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Length: 39 pages
Date of creation: 23 Aug 2011
Date of revision:
Handle: RePEc:ucn:wpaper:201115

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Phone: +353-1-7067777
Fax: +353-1-283 0068
Web page: http://www.ucd.ie/economics
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Keywords: corporate tax reform; trade liberalization; firm heterogeneity;

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References

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Cited by:
  1. Langenmayr, Dominika & Haufler, Andreas & Bauer, Christian J., 2012. "Should tax policy favor high- or low-productivity firms?," Discussion Papers in Economics 14277, University of Munich, Department of Economics.
  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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