Tax Heterogeneity and Misallocation

Baris Kaymak and Immo Schott

No 1393, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: There is substantial asymmetry in effective corporate income tax rates across firms. While tax asymmetries would reduce productivity in frictionless economies, they can improve efficiency in a distorted economy if taxes alleviate other economic frictions. We develop a framework to estimate to what extent tax asymmetries affect productivity in distorted economies. Using US firm-level balance sheet data alongside measures of effective marginal tax rates, we find a positive correlation between tax rates and factor productivity, suggesting that tax asymmetry exacerbates the distortions from other economic frictions. Eliminating tax rate asymmetries would raise aggregate productivity by 3 to 4 percent if taxes distort capital costs alone. Models where taxes also distort the marginal cost of labor predict potential gains as high as 9 percent.

Keywords: Business Taxation; Aggregate Productivity; TFP; Misallocation (search for similar items in EconPapers)
JEL-codes: E23 H25 O47 (search for similar items in EconPapers)
Date: 2024-07-19
New Economics Papers: this item is included in nep-eff, nep-pbe and nep-pub
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Working Paper: Tax Heterogeneity and Misallocation (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1393

DOI: 10.17016/IFDP.2024.1393

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