Should tax policy favor high- or low-productivity firms?

Dominika Langenmayr, Andreas Haufler and Christian J. Bauer

European Economic Review, 2015, vol. 73, issue C, 18-34

Abstract: Heterogeneous firm productivity raises the question of whether governments should pursue ‘pick-the-winner’ strategies by subsidizing highly productive firms more (or taxing them less) than their less productive counterparts. We study this issue in a setting where governments can set differentiated effective tax rates in an oligopolistic industry in which firms with two productivity levels co-exist. We show that the optimal structure of tax differentiation depends critically on the feasible level of the corporate profit tax, which in turn depends on the degree of international tax competition. When tax competition is weak and optimal profit tax rates are high, favoring high-productivity firms is indeed the optimal policy. When tax competition is aggressive and profit taxes are low, however, the optimal tax policy reverses and favors low-productivity firms.

Keywords: Business taxation; Firm heterogeneity; Tax competition (search for similar items in EconPapers)
JEL-codes: F15 H25 H87 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Working Paper: Should tax policy favour high or low productivity firms? (2013)
Working Paper: Should tax policy favor high- or low-productivity firms? (2012)
Working Paper: Should Tax Policy Favor High- or Low-Productivity Firms? (2012)
Working Paper: Should tax policy favor high- or low-productivity firms? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:73:y:2015:i:c:p:18-34

DOI: 10.1016/j.euroecorev.2014.10.005

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