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Effective tax rates, endogenous mark-ups and heterogeneous firms

Michael Irlacher () and Florian Unger

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: We provide a new explanation why effective tax rates are smaller for larger firms even in the absence of common channels like profit shifting and lobbying. This result emerges in a heterogeneous firms model with endogenous mark-ups. Our framework features imperfect tax pass-through into prices and partial deductibility of production costs. Corporate taxes reduce mark-ups and hence pre-tax profits, especially for high cost firms. As production costs are only partially deductible, high cost producers are affected most by taxes. We further show that shocks which affect mark-ups through competition, like globalization, reinforce the heterogeneity in effective tax rates across firms.

Keywords: Heterogeneous firms; Corporate taxation; Effective tax rate; Linear demand; Endogenous mark-ups (search for similar items in EconPapers)
JEL-codes: H25 F12 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2018-05-24
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