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Equity prices, market power, and optimal corporate tax policy

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  • González, Ignacio
  • Montecino, Juan A.
  • Stiglitz, Joseph E.

Abstract

We study the optimal design of corporate tax policy in a textbook life-cycle model featuring two key deviations: (i) firms are imperfectly competitive and (ii) households save by purchasing equity shares in a stock market. In this simple environment, the financial wealth of savers is equal to the sum of the productive capital owned by firms and a component capturing the NPV of unproductive rents – what we term “market power wealth” (MPW). We show that this novel component has non-trivial macroeconomic effects, with important implications for optimal corporate tax policy. In particular, MPW significantly crowds out productive investment and accordingly can rationalize a high corporate tax rate. The optimal corporate tax code in our setting assigns the statutory corporate tax rate to target the financial value of pure profits while incentivizing capital accumulation with a partial expensing of firm investment costs.

Suggested Citation

  • González, Ignacio & Montecino, Juan A. & Stiglitz, Joseph E., 2025. "Equity prices, market power, and optimal corporate tax policy," European Economic Review, Elsevier, vol. 176(C).
    • Handle: RePEc:eee:eecrev:v:176:y:2025:i:c:s0014292125000893
    DOI: 10.1016/j.euroecorev.2025.105039
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    Cited by:

    1. Dustin L. Swonder & Damián Vergara, 2025. "A Sufficient Statistics Approach to Optimal Corporate Taxes," NBER Working Papers 34517, National Bureau of Economic Research, Inc.

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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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