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Economic integration and the optimal corporate tax structure with heterogeneous firms

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

Abstract

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.

Suggested Citation

  • Bauer, Christian J. & Davies, Ronald B. & Haufler, Andreas, 2014. "Economic integration and the optimal corporate tax structure with heterogeneous firms," Munich Reprints in Economics 20123, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:20123
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    Citations

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    Cited by:

    1. repec:ces:ifodic:v:13:y:2015:i:2:p:19170025 is not listed on IDEAS
    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. Bawa, Siraj, 2017. "Corporate Taxation in the Open Economy without Pareto," MPRA Paper 80857, University Library of Munich, Germany, revised Aug 2017.
    4. Sharma, Rishi, 2016. "Taxing and Subsidizing Foreign Investors," Working Papers 2016-03, Department of Economics, Colgate University, revised 25 May 2017.
    5. Fabrice Defever & Alejandro Riaño, 2016. "Protectionism through Exporting: Subsidies with Export Share Requirements in China," Discussion Papers 2016-03, University of Nottingham, GEP.
    6. 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.
    7. 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.
    8. repec:kap:itaxpf:v:25:y:2018:i:2:d:10.1007_s10797-017-9454-3 is not listed on IDEAS
    9. Igor Bagayev & Ronald B. Davies, 2017. "The Impact of Protection on Observed Productivity Distributions," Working Papers 201705, School of Economics, University College Dublin.
    10. Defever, Fabrice & Riaño, Alejandro, 2017. "Subsidies with export share requirements in China," Journal of Development Economics, Elsevier, vol. 126(C), pages 33-51.
    11. 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.
    12. Sharma, Rishi, 2016. "Taxing and Subsidizing Foreign Investors," Working Papers 2016-03, Department of Economics, Colgate University, revised 13 Sep 2016.
    13. Pflüger, Michael & Suedekum, Jens, 2013. "Subsidizing firm entry in open economies," Journal of Public Economics, Elsevier, vol. 97(C), pages 258-271.
    14. Sharma, Rishi, 2016. "Incentives to Tax Foreign Investors," Working Papers 2016-02, Department of Economics, Colgate University, revised 13 Sep 2016.
    15. 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.

    More about this item

    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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