Tax Heterogeneity and Misallocation

RePEc Short ID: pka696
ORCID iD: 0000-0002-6530-0026

Kaymak, Barış; Schott, Immo

doi:10.26509/frbc-wp-202333

Working Paper

Tax Heterogeneity and Misallocation

Abstract: Companies face different effective marginal tax rates on their income. This can be detrimental to allocative efficiency unless taxes offset other distortions in the economy. This paper estimates the effect of tax rate heterogeneity on aggregate productivity in distorted economies with multiple frictions. Using firm-level balance-sheet data and estimates of marginal tax rates, we find that tax heterogeneity reduces total factor productivity by about 3 percent. Our findings highlight the positive correlation between marginal tax rates and other distortions to capital and especially labor. This implies that tax rate heterogeneity exacerbates the distortionary effects of other frictions in the economy.

Keywords: business taxation; aggregate productivity; TFP; misallocation;

JEL Classification: D24; H25; O47;

https://doi.org/10.26509/frbc-wp-202333