Economic Integration and the Optimal Corporate Tax Structure with Heterogeneous Firms

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Title: Economic Integration and the Optimal Corporate Tax Structure with Heterogeneous Firms
Authors: Bauer, Christian
Davies, Ronald B.
Haufler, Andreas
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Date: Aug-2011
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.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Start page: 1
End page: 36
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP11/15
Keywords: Corporate tax reformTrade liberalizationFirm heterogeneity
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Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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