International Finance Discussion Papers (IFDP)
July 2024
Tax Heterogeneity and Misallocation
Baris Kaymak and Immo Schott
Abstract:
There is substantial asymmetry in effective corporate income tax rates across firms. While tax asymmetries would reduce productivity in frictionless economies, they can improve efficiency in a distorted economy if taxes alleviate other economic frictions. We develop a framework to estimate to what extent tax asymmetries affect productivity in distorted economies. Using US firm-level balance sheet data alongside measures of effective marginal tax rates, we find a positive correlation between tax rates and factor productivity, suggesting that tax asymmetry exacerbates the distortions from other economic frictions. Eliminating tax rate asymmetries would raise aggregate productivity by 3 to 4 percent if taxes distort capital costs alone. Models where taxes also distort the marginal cost of labor predict potential gains as high as 9 percent.
Keywords: Business taxation, Aggregate productivity, TFP, Misallocation
DOI: https://doi.org/10.17016/.IFDP.2024.1393
PDF: Full Paper
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