Effective tax rates, endogenous mark-ups and heterogeneous firms
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in: Economics Letters, Jahrgang 173, 12.2018, S. 51-54.
Publikation: Beiträge in Zeitschriften › Zeitschriftenaufsätze › Forschung › begutachtet
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TY - JOUR
T1 - Effective tax rates, endogenous mark-ups and heterogeneous firms
AU - Irlacher, Michael
AU - Unger, Florian
N1 - Publisher Copyright: © 2018 Elsevier B.V.
PY - 2018/12
Y1 - 2018/12
N2 - We provide a new explanation why the effective tax rate is smaller for larger firms, even in the absence of common channels such as profit shifting and lobbying activities. This result emerges in a heterogeneous firms model with endogenous markups based on Melitz & Ottaviano (2008). Our framework features imperfect pass-through of corporate taxes into prices and partial deductibility of production costs. Corporate taxes reduce mark-ups and hence pre-tax profits, especially for high cost firms. As production costs are only partially deductible, low productivity firms are relatively more responsive to tax policy than high productivity firms. We further show that shocks which affect mark-ups through the toughness of competition, such as trade liberalization, reinforce the heterogeneity in effective tax rates across firms.
AB - We provide a new explanation why the effective tax rate is smaller for larger firms, even in the absence of common channels such as profit shifting and lobbying activities. This result emerges in a heterogeneous firms model with endogenous markups based on Melitz & Ottaviano (2008). Our framework features imperfect pass-through of corporate taxes into prices and partial deductibility of production costs. Corporate taxes reduce mark-ups and hence pre-tax profits, especially for high cost firms. As production costs are only partially deductible, low productivity firms are relatively more responsive to tax policy than high productivity firms. We further show that shocks which affect mark-ups through the toughness of competition, such as trade liberalization, reinforce the heterogeneity in effective tax rates across firms.
KW - Corporate taxation
KW - Effective tax rate
KW - Endogenous mark-ups
KW - Heterogeneous firms
KW - Linear demand
KW - Economics
UR - http://www.scopus.com/inward/record.url?scp=85054169806&partnerID=8YFLogxK
U2 - 10.1016/j.econlet.2018.08.035
DO - 10.1016/j.econlet.2018.08.035
M3 - Journal articles
AN - SCOPUS:85054169806
VL - 173
SP - 51
EP - 54
JO - Economics Letters
JF - Economics Letters
SN - 0165-1765
ER -