Optimal Corporation Tax: An I.O. Approach

Abstract

Our IO approach links optimal effective corporation tax rates to the nature of sunk costs within industries. Theory predicts that optimal effective corporation tax rates will be negatively related to industry specific sunk cost, and hence industry concentration. Governments should tax industries with monopolistic power softly. Evidence suggests that this Schumpeterian (1942) principle of corporate taxation was used widely across industries in France, Italy and the UK in the 1990s.

Keywords: Effective Corporation Tax Rate, Sunk Costs, Industry Concentration

JEL Classification: H25, L52