Efficiency Losses from Tax Distortions vs. Government Control

11 Pages Posted: 25 Apr 1999

See all articles by Chong-En Bai

Chong-En Bai

The University of Hong Kong - School of Economics and Finance; University of Michigan - William Davidson Institute

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

David D. Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: June 1998

Abstract

Why has the rapid privatization of firms in Eastern Europe and the former Soviet Union not brought dramatically higher performance as expected? If private ownership were so clearly dominant, why has state control of enterprises been such a common phenomenon historically, even in many Western countries? In this paper, we argue that with private ownership, any price distortions (whether from high tax rates or explicit price controls) generate efficiency losses roughly proportional to the square of the implicit tax rate. In contrast, the efficiency loss under state ownership should be largely independent of these implicit tax rates. Therefore, the efficiency loss from state ownership can be less than that from private ownership when price distortions become large enough. Historically, there does seem to have been a close association between state ownership and high tax rates. For good reasons, privatization is normally associated with sharp drops in tax and nontax distortions. When privatization occurs without a substantial reduction in tax rates, as in Russia, efficiency costs from the high tax rates have been obvious, raising questions about the internal consistency of this set of policies.

JEL Classification: H21, P21

Suggested Citation

Bai, Chong-En and Gordon, Roger H. and Li, David Daokui, Efficiency Losses from Tax Distortions vs. Government Control (June 1998). Available at SSRN: https://ssrn.com/abstract=162108 or http://dx.doi.org/10.2139/ssrn.162108

Chong-En Bai

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
(852) 2859-1036 (Phone)
(852) 2548-1152 (Fax)

University of Michigan - William Davidson Institute ( email )

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Daokui Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
(852) 2358-7610 (Phone)
(852) 2358-2084 (Fax)

HOME PAGE: http://home.ust.hk/~davidli

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