A Sufficient Statistics Approach to Optimal Corporate Taxes

This paper characterizes the equity–efficiency tradeoff of corporate taxation using a stylized model that draws on the corporate investment and tax incidence literatures. We derive optimal corporate tax formulas in terms of estimable reduced-form elasticities and welfare weights on workers and firm owners. While much empirical work emphasizes investment responses, these elasticities do not feature in optimal tax formulas. The elasticity of taxable profits is a sufficient statistic for the efficiency costs of the corporate tax. Higher corporate tax rates are desirable when firm owners have low welfare weights, and less desirable when taxing profits reduces wages. These empirical objects remain central across extensions, including heterogeneous production technologies, tax sheltering, international capital mobility, monopsony, and linear labor income taxes. We survey the empirical literature and find that existing estimates can support a wide range of optimal tax rates. An inverse-optimum analysis provides combinations of welfare weights of workers and firm owners that would rationalize the post-2017 US corporate tax cut as optimal.