Economic Integration and the Optimal Corporate Tax Structure with Heterogeneous Firms

Christian J. Bauer (), Ronald Davies () and Andreas Haufler ()

No 3566, CESifo Working Paper Series from CESifo Group Munich

Abstract: We study the optimal combination of corporate tax rate and tax base in a model of a small open economy with heterogeneous firms. We show that it is optimal for the small country’s government to effectively 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.

Keywords: corporate tax reform; trade liberalization; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: H25 H87 F15 (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
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