Corporate Taxation and Market Power Wealth

52 Pages Posted: 22 Apr 2023

See all articles by Lídia Brun

Lídia Brun

American University

Ignacio González

American University - Department of Economics

Juan Montecino

American University - Department of Economics

Date Written: April 5, 2023

Abstract

We study the aggregate and distributional effects of corporate tax reforms when market power is heterogeneous across sectors and firms. We use a life-cycle model with incomplete markets in which capital and equity do not always move in tandem when corporate tax policy changes. On the one hand, the increase in the tax rate causes the classic partial equilibrium effect of reducing the demand for capital; an effect that can be greater or lower depending on different provisions in the tax code and sectoral characteristics. On the other hand, the tax reduces the value of equity wealth due to the taxation of market power rents, shifting the supply of aggregate equity downward and inducing a negative effect on equity returns. This novel general equilibrium effect reduces the cost of capital and is typically expansionary. In our benchmark calibration, designed to match a realistic distribution of markups and markdowns, as well as the institutional details of the US corporate tax code, increasing the corporate tax rate can stimulate aggregate investment, output, and wages. Moreover, this reform reduces wealth inequality as equity shareholders are concentrated at the top.

Keywords: Corporate Taxes, Asset Valuation, Monopoly, Monopsony, Wealth Inequality, Income Inequality

JEL Classification: D31, H25, J42, L13

Suggested Citation

Brun, Lídia and González, Ignacio and Montecino, Juan, Corporate Taxation and Market Power Wealth (April 5, 2023). Available at SSRN: https://ssrn.com/abstract=4410717 or http://dx.doi.org/10.2139/ssrn.4410717

Lídia Brun

American University ( email )

4400 Massachusetts Ave NW
Washington, DC District of Columbia 20016
United States

Ignacio González (Contact Author)

American University - Department of Economics ( email )

4400 Massachusetts Avenue, NW
Washington, DC 20016
United States

Juan Montecino

American University - Department of Economics ( email )

4400 Massachusetts Avenue, NW
Washington, DC 20016
United States

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