Effective tax rates, endogenous mark-ups and heterogeneous firms

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Effective tax rates, endogenous mark-ups and heterogeneous firms. / Irlacher, Michael; Unger, Florian.
In: Economics Letters, Vol. 173, 12.2018, p. 51-54.

Research output: Journal contributionsJournal articlesResearchpeer-review

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Irlacher M, Unger F. Effective tax rates, endogenous mark-ups and heterogeneous firms. Economics Letters. 2018 Dec;173:51-54. doi: 10.1016/j.econlet.2018.08.035

Bibtex

@article{74ae0603a4b54aee93ee7299dfd41f04,
title = "Effective tax rates, endogenous mark-ups and heterogeneous firms",
abstract = "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.",
keywords = "Corporate taxation, Effective tax rate, Endogenous mark-ups, Heterogeneous firms, Linear demand, Economics",
author = "Michael Irlacher and Florian Unger",
note = "Publisher Copyright: {\textcopyright} 2018 Elsevier B.V.",
year = "2018",
month = dec,
doi = "10.1016/j.econlet.2018.08.035",
language = "English",
volume = "173",
pages = "51--54",
journal = "Economics Letters",
issn = "0165-1765",
publisher = "Elsevier B.V.",

}

RIS

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 -

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