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Loss-offset provisions in the corporate tax code and misallocation of capital

Baris Kaymak and Immo Schott

Journal of Monetary Economics, 2019, vol. 105, issue C, 1-20

Abstract: The corporate tax code allows corporations to write off operating losses against past or future tax obligations, resulting in effective tax rates that are firm-specific and dependent on the history of the firm’s performance. Since losses partly reflect a drop in productivity, which is generally persistent, firms with higher expected productivity face higher tax rates. We analyze the distortionary effects of loss-offset provisions on investment and assess the output loss implied by the misallocation of capital. Replacing the corporate income tax with a revenue-neutral value-added tax which equates tax rates across firms leads to a 13.9% increase in aggregate output.

Keywords: Corporate taxation; Capital misallocation; Tax reform (search for similar items in EconPapers)
JEL-codes: E22 E62 H25 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jmoneco.2019.04.011

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