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Taxes and Privatization

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)

September 2001

CEPR Discussion Paper No. 2977

Why have state-owned firms been so common? One explanation, proposed in the past, is that if state firms can be induced to maximize pretax profits, then state ownership may be less inefficient than private ownership when corporate tax rates are high. If this argument were right, the capital intensity of state-owned firms should fall with privatization. The data instead shows that firms lay off workers when they are privatized. Why? This Paper argues that the government can use cheap loans from state-owned banks to maintain the capital stock of privately owned firms at an efficient level, in spite of a high corporate tax rate. State-owned firms should then have the same capital intensity as equivalent privately owned firms. The Paper then argues that many other distortions to a private firm's incentives, e.g. the minimum wage, result in their employing too few low-skilled workers. State-owned firms, in contrast, can be induced to hire the desired number of such workers. This gain must be weighted against the presumed loss in productivity more generally from state ownership.

Number of Pages in PDF File: 25

Keywords: Privatization, corporate taxes

JEL Classification: H30, L30

Date posted: October 16, 2001  

Suggested Citation

Gordon, Roger H., Taxes and Privatization (September 2001). CEPR Discussion Paper No. 2977. Available at SSRN: https://ssrn.com/abstract=286532

Contact Information

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)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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