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Corporate Taxation in the Open Economy without Pareto

Listed author(s):
  • Bawa, Siraj

This paper studies how optimal corporate tax rates differ when firm productivities are drawn from a lognormal distribution instead of a Pareto, the literature standard, in a model of monopolistic competition. Recent literature has demonstrated that lognormal distributions are a better fit for firm productivities; I not only find that this result holds in developing economies, but that the distributional choice has significant implications for the properties of the optimal corporate tax rates. I show this using an enhanced Melitz model with heterogeneous sectors subject to a framework of corporate taxation. This tax framework consists of a single economy-wide statutory tax that is augmented by a set of sector-specific depreciation allowance rates which distort the effective tax rate by sector. I find that using the Pareto distribution mutes a transmission channel between the corporate tax instruments and the equilibrium variables which leads to qualitative different policy implications compared to those obtained under the lognormal distribution. Additionally, my model can reconcile recent empirical studies that come to seemingly conflicting conclusions about the effects of statutory tax rates on export dynamics. I do this by showing that the level of the sector-specific tax rate determines whether or not changing the statutory tax rate will increase the probability of firms engaging in exporting.

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File URL: https://mpra.ub.uni-muenchen.de/80857/1/MPRA_paper_80857.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 80857.

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Date of creation: Jun 2017
Date of revision: Aug 2017
Handle: RePEc:pra:mprapa:80857
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  1. DEL GATTO, Massimo & MION, Giordano & OTTAVIANO, Gianmarco I.P., 2006. "Trade integration, firm selection and the costs of non-Europe," CORE Discussion Papers 2006061, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. 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.
  3. Alessandria, George & Choi, Horag, 2014. "Do falling iceberg costs explain recent U.S. export growth?," Journal of International Economics, Elsevier, vol. 94(2), pages 311-325.
  4. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September.
  5. Marco Bee & Stefano Schiavo, 2015. "Powerless : gains from trade when firm productivity is not Pareto distributed," Documents de Travail de l'OFCE 2015-19, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Sun, Churen & Tian, Guoqiang & Zhang, Tao, 2011. "When Pareto meets Melitz: the inapplicability of the Melitz-Pareto model for Chinese firms," MPRA Paper 35597, University Library of Munich, Germany.
  7. Paul S. Segerstrom & Yoichi Sugita, 2015. "The Impact Of Trade Liberalization On Industrial Productivity," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1167-1179, December.
  8. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  9. Daniela Federici & Valentino Parisi, 2014. "Corporate Taxation and Exports: Evidence from Italian Firm-Level Data," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 23-38, May.
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