Should Tax Policy Favor High- or Low-Productivity Firms?

29 Pages Posted: 3 Jan 2013  

Dominika Langenmayr

Catholic University of Eichstaett-Ingolstadt; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Haufler

University of Munich - Seminar for Economic Policy; CESifo (Center for Economic Studies and Ifo Institute)

Christian Bauer

Ludwig Maximilians University of Munich - Department of Economics

Date Written: December 28, 2012

Abstract

Heterogeneous firm productivity seems to provide an argument for governments to pursue ‘pick-the-winner’ strategies by subsidizing highly productive firms more, or taxing them less, than their less productive counterparts. We appraise this argument by studying the optimal choice of effective tax rates in an oligopolistic industry with heterogeneous firms. We show that the optimal structure of tax differentiation depends critically on the feasible level of corporate profit taxes, which in turn depends on the degree of international tax competition. When tax competition is moderate and profit taxes are high, favoring high-productivity firms is indeed the optimal policy. When tax competition is aggressive and profit taxes are low, however, the optimal tax policy is reversed and low-productivity firms are tax-favored.

Keywords: business taxation, firm heterogeneity, tax competition

JEL Classification: H250, H870, F150

Suggested Citation

Langenmayr, Dominika and Haufler, Andreas and Bauer, Christian, Should Tax Policy Favor High- or Low-Productivity Firms? (December 28, 2012). CESifo Working Paper Series No. 4034. Available at SSRN: https://ssrn.com/abstract=2195480

Dominika Irma Langenmayr

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Andreas Haufler (Contact Author)

University of Munich - Seminar for Economic Policy ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

HOME PAGE: http://www.ecpol.vwl.uni-muenchen.de

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Christian Josef Bauer

Ludwig Maximilians University of Munich - Department of Economics ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

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