Economic Integration and the Optimal Corporate Tax Structure with Heterogeneous Firms

Christian Bauer (), Ronald Davies and Andreas Haufler

No 201115, Working Papers from School of Economics, University College Dublin

Abstract: We study the optimal combination of corporate tax rate and tax base in a model of a small open economy with heterogeneous firms. We show that it is optimal for the small country's government to effectively subsidize capital inputs by granting a tax allowance in excess of the true costs of capital. Economic integration reduces the optimal capital subsidy and drives low-productivity firms from the small country's home market, replacing them with high-productivity exporters from abroad. This endogenous policy response creates a selection effect that increases the average productivity of home firms when trade barriers fall, in addition to the well-known direct effects.

Keywords: Corporate tax reform; Trade liberalization; Firm heterogeneity (search for similar items in EconPapers)
JEL-codes: F15 H25 H87 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-08
New Economics Papers: this item is included in nep-acc, nep-dge and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://hdl.handle.net/10197/6391 First version, 2011 (application/pdf)

Related works:
Journal Article: Economic integration and the optimal corporate tax structure with heterogeneous firms (2014)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2014)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
Working Paper: Economic Integration and the Optimal Corporate Tax Structure with Heterogeneous Firms (2011)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
Working Paper: Economic integration and the optimal corporate tax structure with heterogeneous firms (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201115

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