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Loss-offset provisions in the corporate tax code and misallocation of capital

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  • Kaymak, Barış
  • Schott, Immo

Abstract

The corporate tax code allows corporations to write off operating losses against past or future tax obligations, resulting in effective tax rates that are firm-specific and dependent on the history of the firm’s performance. Since losses partly reflect a drop in productivity, which is generally persistent, firms with higher expected productivity face higher tax rates. We analyze the distortionary effects of loss-offset provisions on investment and assess the output loss implied by the misallocation of capital. Replacing the corporate income tax with a revenue-neutral value-added tax which equates tax rates across firms leads to a 13.9% increase in aggregate output.

Suggested Citation

  • Kaymak, Barış & Schott, Immo, 2019. "Loss-offset provisions in the corporate tax code and misallocation of capital," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 1-20.
  • Handle: RePEc:eee:moneco:v:105:y:2019:i:c:p:1-20
    DOI: 10.1016/j.jmoneco.2019.04.011
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    References listed on IDEAS

    as
    1. Graham, John R. & Mills, Lillian F., 2008. "Using tax return data to simulate corporate marginal tax rates," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 366-388, December.
    2. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
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    More about this item

    Keywords

    Corporate taxation; Capital misallocation; Tax reform;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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