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Economic integration and the optimal corporate tax structure with heterogeneous firms

Author Info

Listed author(s):
  • 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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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1114.

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Date of creation: 2011
Handle: RePEc:btx:wpaper:1114
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Keywords: corporate tax reform; trade liberalization; firm heterogeneity;

Other versions of this item:

Find related papers by JEL classification:
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
  • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
  • F15 - International Economics - - Trade - - - Economic Integration

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Cited by:

  1. Fabrice Defever & Alejandro Riaño, 2016. "Protectionism through Exporting: Subsidies with Export Share Requirements in China," Discussion Papers 2016-03, University of Nottingham, GEP.
  2. Langenmayr, Dominika & Haufler, Andreas & Bauer, Christian J., 2015. "Should tax policy favor high- or low-productivity firms?," European Economic Review, Elsevier, vol. 73(C), pages 18-34.
  3. Andreas Haufler & Dominika Langenmayr, 2015. "How Does Firm Heterogeneity Affect International Tax Policy?," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(2), pages 57-62, 08.
  4. Ronald Davies & Tine Jeppesen, 2015. "Export mode, firm heterogeneity, and source country characteristics," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(2), pages 169-195, May.
  5. Sharma, Rishi, 2016. "Taxing and Subsidizing Foreign Investors," Working Papers 2016-03, Department of Economics, Colgate University, revised 13 Sep 2016.
  6. Pflüger, Michael & Suedekum, Jens, 2013. "Subsidizing firm entry in open economies," Journal of Public Economics, Elsevier, vol. 97(C), pages 258-271.
  7. Sharma, Rishi, 2016. "Incentives to Tax Foreign Investors," Working Papers 2016-02, Department of Economics, Colgate University, revised 13 Sep 2016.
  8. Igor Bagayev & Ronald B. Davies, 2017. "The Impact of Protection on Observed Productivity Distributions," Working Papers 201705, School of Economics, University College Dublin.
  9. Sharma, Rishi, 2016. "Taxing and Subsidizing Foreign Investors," Working Papers 2016-03, Department of Economics, Colgate University, revised 25 May 2017.
  10. Peter Egger & Horst Raff, 2015. "Tax rate and tax base competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 777-810, October.
  11. Defever, Fabrice & Riaño, Alejandro, 2017. "Subsidies with export share requirements in China," Journal of Development Economics, Elsevier, vol. 126(C), pages 33-51.
  12. Bognetti, Giuseppe & Santoni, Michele, 2016. "Increasing the substitution elasticity can improve VAT compliance and social welfare," Economic Modelling, Elsevier, vol. 58(C), pages 293-307.
  13. Peter Egger & Horst Raff, 2015. "Tax rate and tax base competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 777-810, October.

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