Munich Personal RePEc Archive

Corporate Taxation in the Open Economy without Pareto

Bawa, Siraj (2017): Corporate Taxation in the Open Economy without Pareto.

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Abstract

This paper studies how optimal corporate tax rates differ when firm productivities are drawn from a lognormal distribution instead of a Pareto, the literature standard, in a model of monopolistic competition. Recent literature has demonstrated that lognormal distributions are a better fit for firm productivities; I not only find that this result holds in developing economies, but that the distributional choice has significant implications for the properties of the optimal corporate tax rates. I show this using an enhanced Melitz model with heterogeneous sectors subject to a framework of corporate taxation. This tax framework consists of a single economy-wide statutory tax that is augmented by a set of sector-specific depreciation allowance rates which distort the effective tax rate by sector. I find that using the Pareto distribution mutes a transmission channel between the corporate tax instruments and the equilibrium variables which leads to qualitative different policy implications compared to those obtained under the lognormal distribution. Additionally, my model can reconcile recent empirical studies that come to seemingly conflicting conclusions about the effects of statutory tax rates on export dynamics. I do this by showing that the level of the sector-specific tax rate determines whether or not changing the statutory tax rate will increase the probability of firms engaging in exporting.

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