Size Distribution of Firms, Cournot, and Optimal Taxation

28 Pages Posted: 12 Jan 2007

See all articles by Mark Gersovitz

Mark Gersovitz

Johns Hopkins University - Zanvyl Krieger School of Arts and Sciences; National Bureau of Economic Research (NBER)

Date Written: December 2006

Abstract

Tax laws and administrations often treat different size firms differently. There is, however, little research on the consequences. As modeled here, oligopolists with different efficiencies determine the size distribution of firms. A government that maximizes a weighted sum of consumer surplus, profits, and tax receipts can tax firms with different efficiencies differently and provides a reference point for other, more restricted differential tax systems. Taxes include a specific sales tax, an ad valorem sales tax, and a profits tax with imperfect deductibility of capital cost, and a combination of the last two. In general there is a pattern of tax rates by efficiency of firm. It is heavily dependent on the social valuation of tax receipts. Analytic and simulation results are provided. When both ad valorem taxes and the imperfect profits tax are combined, simulations suggest that the former rate is higher and the latter rate is lower for relatively inefficient firms.

Keywords: Taxation, Profits, Tax rates, Economic models

JEL Classification: H21, H32, L11

Suggested Citation

Gersovitz, Mark, Size Distribution of Firms, Cournot, and Optimal Taxation (December 2006). IMF Working Paper No. 06/271, Available at SSRN: https://ssrn.com/abstract=956734

Mark Gersovitz (Contact Author)

Johns Hopkins University - Zanvyl Krieger School of Arts and Sciences ( email )

Department of Economics
Baltimore, MD 21218
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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