Corporate profit tax, firm entry with unemployment, and income inequality

Leonard F. S. Wang and Ji Sun

Bulletin of Economic Research, 2023, vol. 75, issue 2, 380-392

Abstract: In this paper, we provide a general equilibrium analysis of corporate profit tax on income distribution, unemployment, and wage inequality. With firm dynamics in industrial sector, we identify a new channel through which profit tax affects income and wage inequality: profit tax cut will widen not only the wage gap between skilled and unskilled labor, but also exacerbate the wage inequality of unskilled labor among different sectors. The welfare effect of profit tax cut depends on unemployment deepening (labor‐distortion effect) and more manufacturing firms enter the market (business‐creation effect), eroding the market share of incumbent firms (business‐stealing effect).

Date: 2023
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