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Taxes and Privatization

  • Gordon, Roger H

Why have state-owned firms been so common? One explanation, proposed in the past, is that if state firms can be induced to maximize pretax profits, then state ownership may be less inefficient than private ownership when corporate tax rates are high. If this argument were right, the capital intensity of state-owned firms should fall with privatization. The data instead show that firms lay off workers when they are privatized. Why? This Paper argues that the government can use cheap loans from state-owned banks to maintain the capital stock of privately owned firms at an efficient level, in spite of a high corporate tax rate. State-owned firms should then have the same capital intensity as equivalent privately owned firms. The Paper then argues that many other distortions to a private firm's incentives, e.g. the minimum wage, result in their employing too few low-skilled workers. State-owned firms, in contrast, can be induced to hire the desired number of such workers. This gain must be weighted against the presumed loss in productivity more generally from state ownership.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2977.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2977
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  1. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October.
  2. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November.
  3. le Blanc, B., 1991. "Economies in Transition," Discussion Paper 1991-56, Tilburg University, Center for Economic Research.
  4. Stijn Claesens & Simeon Djankov & Gerhard Pohl, 1997. "Ownership and Corporate Governance : Evidence from the Czech Republic," World Bank Other Operational Studies 11584, The World Bank.
  5. Rafael La Porta & Florencio López-de-Silanes, 1997. "The Benefits of Privatization : Evidence from Mexico," World Bank Other Operational Studies 11583, The World Bank.
  6. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Privatization, public investment, and capital income taxation," Policy Research Working Paper Series 1741, The World Bank.
  7. Mathias Dewatripont & Eric Maskin, 2004. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9605, ULB -- Universite Libre de Bruxelles.
  8. Gordon, Roger H. & Bai, Chong-En & Li, David D., 1999. "Efficiency losses from tax distortions vs. government control," European Economic Review, Elsevier, vol. 43(4-6), pages 1095-1103, April.
  9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  10. Bradford, D., 1988. "An Uncluttered Income Tax: The Next Reform Agenda," Papers 20, Princeton, Woodrow Wilson School - Discussion Paper.
  11. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
  12. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
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