IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/34418.html
   My bibliography  Save this paper

Optimal Dual-Regime Business Tax Systems

Author

Listed:
  • Rishi R. Sharma
  • Joel Slemrod
  • Michael Stimmelmayr
  • John D. Wilson
  • Peter Choi

Abstract

Dual-regime business tax systems typically subject smaller firms to an output (turnover) tax and larger firms to a profit (corporate) tax. Despite their prevalence, there is little formal analysis of their optimal design. This paper addresses this gap by developing a theoretical framework to analyze the optimal tax parameters and the relative performance of two types of dual-regime systems: threshold and minimum tax systems. We show that either type of dual regime system can yield lower social costs than a single regime system. Using parameter values from recent empirical studies, we also show that a generalized minimum tax system we propose would outperform other dual regime systems under most parameter values. These findings carry important policy implications, particularly as many countries currently employ either threshold or minimum tax systems, but none have yet implemented a generalized minimum tax.

Suggested Citation

  • Rishi R. Sharma & Joel Slemrod & Michael Stimmelmayr & John D. Wilson & Peter Choi, 2025. "Optimal Dual-Regime Business Tax Systems," NBER Working Papers 34418, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:34418
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w34418.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pálma Mosberger, 2016. "Accounting versus real production responses among firms to tax incentives: bunching evidence from Hungary," MNB Working Papers 2016/3, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Dharmapala, Dhammika & Slemrod, Joel & Wilson, John Douglas, 2011. "Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1036-1047, October.
    3. Felipe Lobel & Thiago Scot & Pedro Zúniga, 2024. "Corporate Taxation and Evasion Responses: Evidence from a Minimum Tax in Honduras," American Economic Journal: Economic Policy, American Economic Association, vol. 16(1), pages 482-517, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2016. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," Economica, London School of Economics and Political Science, vol. 83(330), pages 219-246, April.
    2. Arbex, Marcelo Aarestru & Mattos, Enlinson, 2020. "Limited tax capacity and the optimal taxation of firms," Textos para discussão 539, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    3. Laszlo Goerke, 2015. "Income tax buyouts and income tax evasion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 120-143, February.
    4. Becker, Johannes, 2025. "Optimal indirect taxation when firms avoid profit taxes," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325467, Verein für Socialpolitik / German Economic Association.
    5. Kaushik Basu & Avinash Dixit, 2017. "Too Small to Regulate," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(1), pages 1-14, March.
    6. Bauer, Christian & Davies, Ronald B. & Haufler, Andreas, 2014. "Economic integration and the optimal corporate tax structure with heterogeneous firms," Journal of Public Economics, Elsevier, vol. 110(C), pages 42-56.
    7. Todd Kumler & Eric Verhoogen & Judith Frías, 2020. "Enlisting Employees in Improving Payroll Tax Compliance: Evidence from Mexico," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 881-896, December.
    8. Harju, Jarkko & Kosonen, Tuomas & Skans, Oskar Nordström, 2018. "Firm types, price-setting strategies, and consumption-tax incidence," Journal of Public Economics, Elsevier, vol. 165(C), pages 48-72.
    9. Irene Di Marzio & Sauro Mocetti & Enrico Rubolino, 2024. "The market externalities of tax evasion," Temi di discussione (Economic working papers) 1467, Bank of Italy, Economic Research and International Relations Area.
    10. Bendicta Marzinotto & Ladislav Wintr, 2019. "Employment protection and firm-level job reallocation: Adjusting for coverage," BCL working papers 131, Central Bank of Luxembourg.
    11. Gresik, Thomas A. & Schindler, Dirk & Schjelderup, Guttorm, 2025. "Playing easy or playing hard to get: When and how to attract FDI," Journal of Economic Behavior & Organization, Elsevier, vol. 237(C).
    12. Rishi R. Sharma, 2017. "Taxing and Subsidizing Foreign Investors," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 73(4), pages 402-423, December.
    13. Koichiro Ito & James M. Sallee, 2018. "The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel Economy Standards," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 319-336, May.
    14. Ravi Kanbur & Michael Keen, 2014. "Thresholds, informality, and partitions of compliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 536-559, August.
    15. Kleven, Henrik & Best, Michael & Spinnewijn, Johannes & Waseem, Mazhar & Brockmeyer, Anne, 2013. "Production vs Revenue Efficiency With Limited Tax Capacity: Theory and Evidence From Pakistan," CEPR Discussion Papers 9717, C.E.P.R. Discussion Papers.
    16. Christian Ebeke & M Mansour & Grégoire Rota-Graziosi, 2016. "The Power to Tax in Sub-Saharan Africa: LTUs, VATs, and SARAs," Working Papers halshs-01332049, HAL.
    17. repec:cep:stieop:41 is not listed on IDEAS
    18. Dimitrios Varvarigos & Eleni Stathopoulou, 2023. "On the relation between corruption and market competition," Economic Inquiry, Western Economic Association International, vol. 61(1), pages 99-121, January.
    19. Saez, Emmanuel & Seim, David, 2025. "Wealth tax enforcement in Sweden: Filing requirements and pre-populated returns," Journal of Public Economics, Elsevier, vol. 249(C).
    20. Sipos, Norbert & Lukovszki, Lívia & Rideg, András, 2020. "A társasági adókulcs 2017. évi változása Magyarországon. Vállalati adatokon végzett vizsgálat az effektív adóráta alapján [Analysis of the reflection of corporate tax-rate change in 2017 on the eff," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 762-786.
    21. Ahmad, Ehtisham & Best, Michael, 2012. "Financing social policy in the presence of informality," LSE Research Online Documents on Economics 57964, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:34418. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.