Tax Heterogeneity and Misallocation

Baris Kaymak and Immo Schott

No 23-33, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Companies face different effective marginal tax rates on their income. This can be detrimental to allocative efficiency unless taxes offset other distortions in the economy. This paper estimates the effect of tax rate heterogeneity on aggregate productivity in distorted economies with multiple frictions. Using firm-level balance-sheet data and estimates of marginal tax rates, we find that tax heterogeneity reduces total factor productivity by about 3 percent. Our findings highlight the positive correlation between marginal tax rates and other distortions to capital and especially labor. This implies that tax rate heterogeneity exacerbates the distortionary effects of other frictions in the economy.

Keywords: business taxation; aggregate productivity; TFP; misallocation (search for similar items in EconPapers)
JEL-codes: D24 H25 O47 (search for similar items in EconPapers)
Pages: 39
Date: 2023-12-19
New Economics Papers: this item is included in nep-acc, nep-eff, nep-pbe and nep-pub
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Working Paper: Tax Heterogeneity and Misallocation (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:97473

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DOI: 10.26509/frbc-wp-202333

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