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Should tax policy favour high or low productivity firms?

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  • Dominika Langenmayr

    () (University of Munich)

  • Andreas Hau fler

    (University of Munich and CESifo)

  • Christian J. Bauer

    () (University of Munich and CESifo)

Abstract

Heterogeneous firm productivity raises the question of whether governments should pursue `pick-the-winner' strategies by subsidizing highly productive firms more, or taxing them less, than their less productive counterparts. We study this issue in a setting where governments can set differentiated effective tax rates in an oligopolistic industry where firms with two productivity levels co-exist. We show that the optimal structure of tax differentiation depends critically on the feasible level of the corporate profit tax, which in turn depends on the degree of international tax competition. When tax competition is weak and optimal profit tax rates are high, favouring high-productivity firms is indeed the optimal policy. When tax competition is aggressive and profit taxes are low, however, the optimal tax policy reverses and favours low-productivity firms.

Suggested Citation

  • Dominika Langenmayr & Andreas Hau fler & Christian J. Bauer, 2013. "Should tax policy favour high or low productivity firms?," Working Papers 1308, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1308
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    Cited by:

    1. De Pinto, Marco & Goerke, Laszlo, 2016. "Welfare-enhancing Trade Unions in an Oligopoly with Excessive Entry," Annual Conference 2016 (Augsburg): Demographic Change 145498, Verein für Socialpolitik / German Economic Association.
    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. repec:kap:jtecht:v:43:y:2018:i:3:d:10.1007_s10961-017-9572-1 is not listed on IDEAS
    4. Sharma, Rishi, 2016. "Incentives to Tax Foreign Investors," Working Papers 2016-02, Department of Economics, Colgate University, revised 13 Sep 2016.

    More about this item

    Keywords

    business taxation; firm heterogeneity; tax competition;

    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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