Lobbying for capital tax benefits and misallocation of resources during a credit crunch

Gabriel Zaourak

No 8394, Policy Research Working Paper Series from The World Bank

Abstract: Corporations often have strong incentives to exert influence on the tax code and obtain additional tax benefits through lobbying. For the U.S. financial crisis of 2007-09, this paper shows that lobbying activity intensified, driven by large firms in sectors that depend more on external finance. Using a heterogeneous agent model with financial frictions and endogenous lobbying, the paper studies the aggregate consequences of this rise in lobbying activity. When calibrated to U.S. micro data, the model generates an increase in lobbying that matches the magnitude and the cross-sector and within-sector variation observed in the data. The analysis finds that lobbying for capital tax benefits, together with financial frictions, accounts for 80 percent of the decline in output and almost all the drop in total factor productivity observed during the crisis for the non-financial corporate sector. Relative to an economy without lobbying, this mechanism increases the dispersion in the marginal product of capital and amplifies the credit shock, leading to a one-third larger decline in output. The paper also studies the long run effects of lobbying. Restricting lobbying implies welfare gains of 0.3 percent after considering the transitional dynamics to the new steady state.

Keywords: Taxation&Subsidies; Macro-Fiscal Policy; Public Finance Decentralization and Poverty Reduction; Public Sector Economics; Economic Adjustment and Lending; International Trade and Trade Rules; Renewable Energy; Rural and Renewable Energy; Textiles; Apparel&Leather Industry; Common Carriers Industry; Plastics&Rubber Industry; General Manufacturing; Business Cycles and Stabilization Policies; Construction Industry; Food&Beverage Industry; Pulp&Paper Industry (search for similar items in EconPapers)
Date: 2018-04-02
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Citations: View citations in EconPapers (1)

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