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Economic integration and the optimal corporate tax structure with heterogeneous firms

  • Bauer, Christian
  • Davies, Ronald B.
  • Haufler, Andreas

This paper links recent tax-rate-cut-cum-base-broadening reforms of corporate taxation to the closer integration of international trade. We study the corporate tax structure in a small open economy with heterogeneous firms, in a setting where it is optimal to 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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 110 (2014)
Issue (Month): C ()
Pages: 42-56

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Handle: RePEc:eee:pubeco:v:110:y:2014:i:c:p:42-56
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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