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The relationship between privatization and corporate taxation policies

Yi Liu (), Toshihiro Matsumura () and Chenhang Zeng ()
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Yi Liu: Hunan University
Chenhang Zeng: Zhongnan University of Economics and Law

Journal of Economics, 2021, vol. 133, issue 1, No 4, 85-101

Abstract: Abstract We investigate how the corporate (profit) tax rate affects the optimal degree of privatization in a mixed duopoly with a minimal profit constraint for the private firm. We show that the profit tax rate directly affects the behavior of the partially privatized firm, and therefore affects the behavior of the private firm through strategic interactions. Regardless of whether the constraint is binding, the optimal degree of privatization increases with the corporate tax rate. The reason is that an increase of corporate tax rate reduces the profits flowing to foreign investors, which mitigates the welfare losses of privatization. Furthermore, the optimal degree of privatization decreases (increases) with the foreign ownership share in the private firm if the constraint is ineffective (effective). This result suggests that a minimal profit constraint can be crucial in the optimal privatization policy.

Keywords: Profit tax; Minimal profit constraint; Foreign ownership; Optimal public ownership; D43; H44; L33 (search for similar items in EconPapers)
Date: 2021
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Working Paper: The Relationship between Privatization and Corporate Taxation Policies (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:133:y:2021:i:1:d:10.1007_s00712-020-00720-w

DOI: 10.1007/s00712-020-00720-w

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